Partnering for investment in Canada’s prosperity · Canada’s prosperity requires closing the productivity gap 9 Improving productivity is the key challenge to eliminate our prosperity

Partnering for investmentin Canada’s prosperity

Presented at the Annual Meeting 2004 of the World Economic ForumDavos, SwitzerlandJanuary 2004

Foreword andacknowledgements

Partnering for investment in Canada’s prosperity

The Institute for Competitiveness & Prosperity is an independent not-for-profit organization established in 2001 to serve as the research arm of Ontario’s Task Force on Competitiveness, Productivity & Economic Progress.

The mandate of the Task Force, announced in the April 2001 Speech from the Throne, is to measure and monitorOntario’s competitiveness, productivity and economicprogress compared to other provinces and US states and to report to the public on a regular basis.

It is the aspiration of the Task Force to have a significantinfluence in increasing Ontario’s competitiveness,productivity and capacity for innovation. The Task Forcebelieves this will help ensure continued success in thecreation of good jobs, increased prosperity and a highquality of life for all Ontarians. The Task Force intends to seek breakthrough findings from their research and to propose significant innovations in public policy to stimulate businesses, governments and educational institutions to take action.

This special report on Canada’s competitiveness and prosperity was prepared for the 2004 Annual Meeting of the World Economic Forum in Davos. It was made possible by support from Magna International Inc. and the Joseph L. Rotman School of Management.

We welcome your comments on this report.

The Institute for Competitiveness & Prosperity is funded by the Government of Ontario through the Ministry ofEconomic Development & Trade.

Copyright © January 2004

The Institute for Competitiveness & Prosperity

ISBN 0-9730858-6-X

Exhibits

Exhibit 1: Canada’s economy outperforms most others

Exhibit 2: Canada’s prosperity gap persists

Exhibit 3: Institute assesses four elements of prosperity

Exhibit 4: Productivity drives Canada’s prosperity gap with the US

Exhibit 5: Traded industries are grouped into 41 clusters

Exhibit 6: Clusters of traded industries drive productivity and innovation

Exhibit 7: Canada has a similar mix of clusters to the United States

Exhibit 8: Urbanization drives productivity

Exhibit 9: Canada trails the US in educational attainment

Exhibit 10: AIMS drives prosperity

Exhibit 11: Canada’s spending lags the US’s at all levels of education

Exhibit 12: University degree attainment is higher in the US than in Canada

Exhibit 13: Canada’s capital investment trailed the US in the last decade

Exhibit 14: Governments in Canada have shifted spending from investment to consumption

Exhibit 15: Immigration increases educational achievement in Canada’s workforce

Exhibit 16: Americans place more value on university education

Exhibit 17: Ontario’s tax disadvantage widened in 2003

Exhibit 18: Cluster strength is the result of 4 interrelated factors

7

8

10

11

12

13

14

15

16

17

18

20

21

22

23

26

27

29

Foreword 4

Partnering for prosperity in Canada 6

Canada’s economy is strong 7

The prosperity gap hinders increases in living standards 8

Canada’s prosperity requires closing the productivity gap 9

Improving productivity is the key challenge to eliminate our prosperity gap 9

GDP per capita is the best measure of economic progress and prosperity 9

Four elements drive GDP per capita 10

Productivity has the largest impact on prosperity gap 11

Productivity gains count 16

Canada under invests for tomorrow’s prosperity 17

Canada’s under investment permeates our economy 17

Investment in education lags the US 17

Canada also trails in productivity-enhancing capital investments 20

Spending by governments in Canada has shiftedfrom investment to consumption over the last decade 22

Under investment in immigrant integration limits our competitive advantage 23

Under investment in our city regions contributes to the prosperity gap 25

Motivations and structures hinder investment for the future 26

Motivations and Structures appear to drive our under investment behaviour 26

Minimal attitudinal differences are not a significant roadblock to our prosperity 26

Governments need to address the widening disadvantage inCanada’s effective tax burden – a critical aspect of motivations 27

New market and governance structures can support investmentsfor innovation and upgrading 29

Partnering for Investment 31

Heighten aspirations across Canada 31

Canadians need to encourage students to invest in their higher education 31

Canada needs to invest in processes for integrating immigrantsmore effectively into our economy 31

Canadian stakeholders need to take initiatives to address thechronic under investment by businesses in machinery and equipment 32

Provincial and federal governments need to rethink our tax systemto encourage investment 32

Canadians need to ensure market structures support break out investment 32

Previous publications 33

Contents

4 |

Welcome to Davos and the 2004 Annual Meeting of the World Economic Forum. This is animportant forum regarding how we can make the world safer and more prosperous. It is alsoan opportunity for Canadian leaders to come together to discuss the key economic issuesfacing our country.

In my work on Ontario’s Task Force on Competitiveness, Productivity, and EconomicProgress, I have seen first hand how Canadian individuals, businesses, and governments havepartnered to create one of the best-performing economies in the world. Nevertheless, ourwork has also shown that we have a significant prosperity gap with the most successfuleconomy in the world, the United States. This gap, measured by gross domestic product percapita, grew most significantly between 1982 and 1998. Although the gap has been narrowingsince that time, it remains significant. Today, our challenge is to close this gap.

This report, Partnering for investment in Canada’s prosperity, prepared by the Institute forCompetitiveness & Prosperity, analyzes Canada’s prosperity gap and recommends ways thatCanada can increase its competitiveness. The report recommends that governments re-orienttheir spending patterns and their taxation policies; that businesses invest more in productivityenhancing machinery, equipment, and worker training; and that individuals invest more intheir own education and knowledge. The Institute’s work creates an opportunity forCanadians to consider together how we can address the prosperity gap.

Magna is pleased to support the Institute’s effort to encourage discussion about opportunitiesfor Canadians to partner for prosperity.

Belinda StronachPresident and Chief Executive Officer Magna International Inc.

Foreword

| 5

I am pleased to present this special report, Partnering for investment in Canada’s prosperity, onthe occasion of the 2004 Davos conference, “Partnering for Prosperity and Security.” TheInstitute for Competitiveness & Prosperity has extended its analysis of productivity inOntario and highlights the results of our research on understanding Canada’s prosperity gapversus the United States.

We continue to take pride in the achievements of Canadians in creating one of the world’smost successful economies. In fact, other than the United States, no other country of compa-rable or greater size and population has achieved our level of prosperity. But we also continueto urge Canadians to aspire to close the prosperity gap. Raising productivity – the ability ofour people, firms, and governments to create value from our labour, intellectual, physical, andnatural resources – is the key to closing this prosperity gap.

The major conclusion of this report is that Canadians are not investing adequately to increaseour productivity and prosperity. In fact, we come up 15 percent short of prosperity in theUnited States mainly because our investments stop about 15 percent short. While Canadianshave the basics in place – we invest in the right things and almost to the same level as theUnited States – we stop investing long before our American counterparts. This is especiallytrue in education and integration of immigrants to develop our human capital; in machineryand equipment to build our physical capital; and in our cities and by our governments toraise human, social and physical capital.

Our research shows that attitudinal differences with the United States do not likely accountfor this investment gap. Instead, the source of the gap is in motivations and structures. Ourdisadvantage in marginal effective tax burdens, which drive motivations to invest, haswidened. And our market and governance structures seem to be limiting prosperity gains. Inour ongoing work, we are exploring the complexities of these structures to determine how tomake them more effective in building our prosperity.

We gratefully acknowledge the funding support from the Ontario Ministry of EconomicDevelopment and Trade and the special funding for this report from Magna International Inc.and the Rotman School of Management.

We look forward to sharing and discussing our work and our findings with all Canadians. Wewelcome your comments and suggestions.

Roger L. MartinDean, Joseph L. Rotman School of Management, University of Toronto Chairman, Institute for Competitiveness & Prosperity

Partnering for investment in Canada’s prosperity

regions to expand their potential marketsand to focus on specific products, services,and capabilities. But that means that theyhave to be internationally competitive intheir specialization.

The Institute for Competitiveness &Prosperity has analyzed Canada’s internationalcompetitiveness and identified a prosperitygap with the United States – our most signif-icant trading partner and North Americanneighbour – that is widening and worrisome.To reverse this trend, Canadian individuals,businesses, and governments need topartner more effectively to generate higherprosperity from our capital, human, andnatural resources. Our efforts today repre-sent our investment for future generations.

Canada’s economy is strong In Canada, our economic strength encour-ages optimism about our future prospects.Our economy continues to grow and is oneof the strongest in the world, leading anycomparable region outside the United States(Exhibit 1). By most measures, Canada’seconomy is vibrant and robust. In absoluteterms, Canada’s economy has performedwell, achieving above-average growth ineconomic output, eliminating governmentdeficits, and purging the curse of inflation.

Canada continues to be one of the bestplaces in the world to live, work, and invest.We have responded well to the challenges ofglobalization. Canada’s exports in 2002 stoodat an unprecedented level of $472 billion –more than 40 per cent of the Canada’soutput. Canada leads the world’s topperforming economies in exports as a shareof the economy and on a per capita basis.

Note that throughout this report we useconstant 2002 Canadian dollars usingpurchasing power parity conversion unlessotherwise noted.

GDP per Capita at Purchasing Power Parity in C$ (2002)

RANK COUNTRY GDP per Capita at PPP

1 United States $43,600

2 Canada

4 Netherlands

5 Germany

6 France

7 United Kingdom

8 Japan

9 Italy

10 Taiwan

$36,800

$32,600

$31,500

$31,300

$30,700

$30,700

$30,600

$30,000

3 Australia $33,200

Exhibit 1 Canada’s economy outperforms most others

Source: Institute for Competitiveness & Prosperity, World Economic Forum

Note: Only countries with populations over 15 million (i.e., half of Canada’s or greater)

Canada’s economy is strong, ranking amongthe most prosperous countries in the world.Canadians also enjoy a stable and secure environment, with a society that, whilediverse, is socially cohesive, sharing funda-mental values from coast to coast.

But we cannot stand still. In today’s world,competitiveness is not an option. To ensureCanada’s standard of living continues to rise,our economy must grow. To grow, oureconomy must be competitive with otherjurisdictions, particularly our most significant trading partners.

Competitiveness depends on our capability to produce and sell superior products and services that customers in Canada and therest of the world are eager to buy. Or it cancome from selling our products and servicesat attractive prices because they are producedat lower costs with superior processes ortechnologies. Increased international tradeand globalization have enabled firms and

Partnering for prosperity in Canada

8 | Institute for Competitiveness & Prosperity

than doubling in real dollars per capita.Since 1998 the gap has moderated somewhatto just under $6,800 in 2002.

This prosperity gap does not derive from afundamental weakness in our economy, suchas demographics, industry mix, or work forcecharacteristics. The gap does indicate thatCanadians are not deriving as much strengthfrom our available resources as we could. Wehave found no reason why we should acceptbeing a distant second to the United States.

By not realizing our full economic potentialwe are less able to increase our economy’scapacity for future upgrades and innovationsand to support higher spending in areassuch as health care and education. And,without action, we will witness growingdisparities in economic well-being with ourneighbours to the south.

The prosperity gap hinders increasesin living standardsAs comforting as Canada’s position may lookglobally, the Institute has concluded that amore relevant comparison is with the UnitedStates. We believe it provides the most appro-priate benchmark for our own economicprogress. Against the United States, we havea significant prosperity gap (Exhibit 2).

Our relatively poor prosperity ranking isworrisome not only because the gap is large,but also because it has slowly and steadilycontinued to widen over the past twodecades. In 1982, for example, Canada wasonly 10.9 percent or $3,100 behind theUnited States. Between 1982 and 1998 theprosperity gap between Canada and theUnited States widened considerably – more

The prosperity gap matters: $6,800 in GDPper capita translates into a yearly differencein after-tax disposable income of just over$10,000 per family. If the gap were eliminated,the economic well-being of Canadianswould be enhanced. Families could enjoy theadditional income in many different ways,based upon 2000 Statistics Canada data onhousehold expenditure.1 For example,among mortgage holders the average annualmortgage payment ($9,700) could becovered entirely. Among tenants, averagerent payments of $6,400 could be offset, orrenters could choose to own. In addition,purchasing a car ($12,200) would be easier,many more could make significant increasesto RRSP contributions, or people couldsignificantly increase their annual charitabledonations from the current level of $1,800.Further, provincial and federal governments

Exhibit 2 Canada’s prosperity gap persists

GDP per capita’000 C$ (2002)

Prosperity Gap(’000 C$)

US

Canada

1970 ’72 ’74 ’76 ’78 ’80 ’82 ’84 ’86 ’88 ’90 ’92 ’94 ’96 ’98 ’00 ’02

Source: Statistics Canada, Cansim II, Table No. 380-0002, 510-001, 380-0017; US Bureau of Economic Analysis, Available online at: http://www.bea.gov

’000 C$

$45

40

35

30

25

20

15

10

5

0Year

3.1

3.4

6.8

8.1

1 Statistics Canada, “Spending Patterns in Canada 2000,” Catalogue no. 62-202-XIE

Partnering for investment in Canada’s prosperity | 9

We believe that partnering for investmentwill help close the gap and lead to futureprosperity in Canada. Governments,businesses, and individuals should exploreways to work together to enhance the longterm-well being of Canadians.

Improving productivity is the key challenge to eliminate our prosperity gapThe Institute has conducted intensive analyses to develop new insights into theexplanations of the differences in perform-ance between Canada and the US. We argue that Gross Domestic Product (GDP)per capita is the key measure of economicprogress, review the elements that drive itsgrowth, and show that strengtheningproductivity has the most potential forimproving our standard of living.

GDP per capita is the best measure ofeconomic progress and prosperity We concur with most economic observersthat GDP per capita is the best measure ofhow an economy is performing over timeand against its peers. GDP per capita measures the output of an economy, or the“value added.” We can think of this as thevalue created in the conversion of thecountry’s natural, labour, and capitalresources into products and services thatconsumers buy here and around the world.GDP captures costs of inputs and value of

would also benefit, collecting approximately$75 billion annually, from Canadian taxpayerswithout increasing rates. This additional taxrevenue would enable Canada’s governmentto address funding issues in health care,education, and social services.

In summary, Canada’s economic performancehas been very positive. But we can do better.

Canada’s prosperity requires closingthe productivity gapOur economic progress is inextricably tiedto the United States. To maintain our strongposition, we have no choice but to strive toperform as well or better economically thanthe United States.

We think Canadians ought to aspire tonarrow the prosperity gap over the nextdecade. This will require bold initiatives bothin public policy and in private strategies.

In this report, the Institute discusses thereasons for the prosperity gap and recommends a set of initial actions forclosing it. We are convinced that improvingproductivity is the key challenge to eliminateour prosperity gap. Our work identifies theunder investment that permeates oureconomy as our most pressing problem.And we see that motivations and structuresare important hindrances to investment for the future.

outputs. To the extent that we offer better ormore innovative products and services thatcommand higher prices, our GDP increases.Similarly, to the extent that we generateincreasing demand for attractively priced products by using our inputs more productively, our GDP increases.

Another important reason for choosing GDPper capita as our measure of prosperity isthat it allows us to benchmark our progressagainst most other countries around theworld. It is the most commonly reportedstatistic at national and regional levels. Someobservers prefer other measures of prosperitysuch as National Income, Personal Income,or Personal Disposable Income. Given thatGDP correlates very closely with these measures and is generally accepted aroundthe world, we chose GDP per capita as ourmeasure of economic prosperity.


Four elements drive GDP per capita We have shown that Canada lags the US andthat our prosperity gap has grown over thelast two decades. To understand the reasonsfor this performance trend, we have built onthe framework developed by John Baldwinand others at Statistics Canada to disaggregateGDP per capita into measurable elements(Exhibit 3):

• Profile – the proportion of Canada’s totalpopulation who are of working age tocontribute to our economic performance

• Utilization – the proportion of theworking-aged population who actuallylook for and find employment

• Intensity – the amount of time those whodo work are actually working

• Productivity – the success in translatingworking hours into products and servicesof value to customers in Canada andaround the world.

To gain further insight into these elements,we sub-divide two of them further.

We examine two sub-elements of utilization –the rate at which working-age Canadiansparticipate in the labour force by beingemployed or seeking employment, and theproportion of labour force participants whoare successful in finding employment.

We examine six sub-elements of productivity:

• the mix of our industries into traded clusters, local industries, and naturalresources;

• the sub-industries that make up our clusters of traded industries;

• the degree to which our population livesin urban centres;

• the educational attainment of our population and its impact on productivity

• the degree to which physical capitalsupports the productivity of workers

• the effectiveness with which we generatevalue based on the platform created by all of the other sub-elements – that is,the residual difference.

Profile Utilization Intensity Productivity

Source: Adapted from Baldwin, J., Maynard, J.P., Wells, S. (2000). “Productivity Growth in Canada and the United States.” ISUMA. Vol. No. 1 (Spring 2000), Ottawa Policy Research Institute

Prosperity

• Participation • Cluster mix

• Employment • Cluster content

• Urbanization

• Effectiveness

• Education

• Capital Investment

Potential labour force

Population

JobsX X X

Potential labour force

Hours Worked

Jobs

GDP

Hours WorkedGDP Per Capita =

Exhibit 3 Institute assesses four elements of prosperity


Utilization of the working age population is a slight disadvantage for Canada. Canadahas nearly the same percentage of itsworking-aged population seeking work (67.1 percent) compared to the US (66.6 percent). This equates to a $300 percapita prosperity advantage for Canada.However, Canada’s economy continues to beslightly less capable of creating jobs for itsresidents seeking work (a 92.3 percentemployment rate versus 94.2 percent in theUS in 2002). This under performance inemployment accounts for $800 of the prosperity gap. The net effect of these tworesults is under performance of about $500in GDP per capita.

Productivity has the largest impact on prosperity gapThe most significant contributor to the pros-perity gap is productivity (Exhibit 4).

Profile, Utilization, and Intensity have a limited impact on the prosperity gap Canada’s economy is strengthened relative tothat of the US by a slightly higher proportionof our population who are of working age (67.4 percent of Canada’s population isbetween ages 16 and 64 compared to 65.2 percent in the US). Canada’s demographic profile represents an advantagerelative to the US; if demographic profilewere the only factor in economic performanceCanada’s GDP per capita would be about$1,200 higher than that in the US.

For most of the last twenty years, officialstatistics report that Canadians have workedfewer hours than Americans. Based on 2002results of Canada-US intensity difference(34.1 hours worked per week in Canadaversus 34.2 hours in the US), we can attribute $100 per capita of the prosperitygap to this factor.

Taken together, profile, utilization, andintensity actually enhance our GDP percapita comparison with the US. Theycontinue to represent limited potential forclosing the prosperity gap.

Exhibit 4 Productivity drives Canada’s prosperity gap with the US

Prosperity Gap$6.8 or 15.5% ofUS GDP/capita

US GDPper capita

Profile Participation Employment Intensity ClusterMix

ClusterContent

Urbanization Education CapitalInvestment

Effectiveness

Profile ProductivityIntensityUtilization

Canada'scurrent

GDPper capita

(84.5%of US)

$43.6$1.2 $0.3

$0

$36.8

$1.2

-$3.2 -$1.1-$1.0

-$3.3

-$0.8 -$0.1

Source: Statistics Canada, Bureau of Economic Analysis, Institute for Competitiveness & Prosperity

GDP per capita ‘000 C$ (2002)


ness, Harvard Business School has identifiedthe contribution of clusters of traded indus-tries to regional and national economies.Traded industries are those that are concen-trated in specific geographic areas and sell tomarkets beyond their local region. Porteridentifies two other types of industries: localindustries, which are present in mostgeographic areas and primarily serve theirlocal markets; and natural resource indus-tries, which are located primarily on the basisof resource endowments.

Productivity is the key driver of the prosperity gap Productivity accounts for the largest share ofour prosperity gap with the US. In analyzingproductivity we have assessed six sub-elements.

Cluster mix and cluster content in Canadacontribute positively to our productivity. Inprevious work, we identified the importanceof clusters of traded industries to aneconomy’s productivity, innovation, andstandard of living.2 Professor Michael Porterof the Institute for Strategy and Competitive-

Porter also identifies clustering patternsamong traded industries using the correlation of industry employment acrossgeographic areas (Exhibit 5). Industries thatare highly correlated constitute clusters.3

Within clusters, groups of industries with aparticularly strong correlation are identifiedas sub-clusters. For example, theInformation Technology cluster comprisesfive sub-clusters: computers, peripherals,electronic components and assemblies,communications services, and software.

Source: Porter, Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School

Final Consumption Goods and ServicesIndustrial and Supporting FunctionsUpstream Materials and Products

Multiple Business

Education and Knowledge Creation

Business Services

Heavy Machinery

Financial Services

Motor Driven Products

Prefabricated Enclosures

Production Technology

Analytical Instruments

Heavy Construction Services

Transportation and Logistics

Automotive

Distribution Services

Transportation and Logistics

Power

Power Generation and Transmission

Office

Publishing and Printing

Telecommunications

Communications Equipment

Defense

Aerospace Engines

Aerospace Vehicle and Defense

Food/Beverages

Agricultural Products

Processed Food

Fishing and Fishing Products

Housing/Household

Building Fixtures, Equipment & Services

Lighting and Electrical Equipment

Furniture

Textiles/Apparel

Textiles

Apparel

Leather and Related Products

Footwear

Sporting, Recreational and Children's Goods

Health Care

Medical devices

Biopharmaceuticals

Personal

Jewelry and Precious Metals

Tobacco

Entertainment

Entertainment

Hospitality and Tourism

Metals and Materials

Construction Materials

Metal Manufacturing

Forest Products

Forest Products

Petroleum/Chemicals

Oil and Gas Products and Services

Chemical Products

Plastics

Semiconductors/Computer

Information Technology

Exhibit 5 Traded industries are grouped into 41 clusters

2 Institute for Competitiveness & Prosperity, A View of Ontario: Ontario’s Clusters of Innovation, April 2002, pp. 18-20, 26-273 For more information on the Cluster Mapping Project, see the Institute for Strategy and Competitiveness Web site: http://www.isc.hbs.edu


Traded clusters provide opportunities forgrowth and utilization that surpass those in the local economy. Further research byPorter has shown that clusters of tradedindustries increase productivity (as represented by wages) and innovation(Exhibit 6).

In addition, the presence of traded clustersin a region has a spillover effect in that theytypically generate opportunities forincreased success of the local economy. The“tide” of traded clusters raises the prosperitylevel for both local and traded industries,and everyone benefits.

Wages(US $000)

Employment

2001 US results

Wages

Exhibit 6 Clusters of traded industries drive productivity and innovation

LocalTraded Natural resources

Patents / 10,000 employees

$50

40

30

20

10

0

25

20

15

10

5

0

42%32%


and productivity differences across sub-clusters. One of the issues being discussed by business analysts and economists is“hollowing out.” Some observers believe thatCanada is losing the high value-addedcomponent of its industries, as head officesand decision-makers relocate outside thecountry. As we analyze the sub-clusters thatmake up our clusters of traded industriesand compare these with the mix in the US,we conclude that the impact of clustercontent on GDP per capita is essentially thesame in the US and Canada.

Drawing on Porter’s methodology, theInstitute has determined that fully 37.6percent of employment in Canada is in clus-ters of traded industries versus 31.6 percentin the US. It turns out that, within the tradedclusters, our mix is remarkably similar tothat in the US (Exhibit 7). That is to say, ourmix of traded versus local clusters andweighting across traded clusters would beexpected to produce a $1,200 higher GDPper capita, other things being equal.4

Sub-clusters make up each cluster of tradedindustries.5 As with clusters, there are wage

Relatively low urbanization is a significantcontributor to the prosperity gap. TheInstitute has synthesized current research byCanadian and other urban geographers andeconomists6 that linked urbanization,innovation, learning, and urban policy.We found that the increased social andeconomic interaction of people and firms,the cost advantages of larger-scale markets,and a diversified pool of skilled labour allimprove productivity in urban areas.7

The interplay of these factors promotesinnovation and growth in an economy.

Traded Cluster* (Rank in Canada, Rank in US)

* US Statistics – 1999, Canadian Statistics – 2000

Source: Canadian Business Patterns; Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School

Share of Employment in Traded Clusters (%)

Business Services 11

Financial Services 22

Automotive 910

Heavy ConstructionServices

66

Processed Food 98

Entertainment 1110

Distribution Services 57

Transportation andLogistics

57

Metal Manufacturing11

8

Education and Knowledge Creation

44

Hospitality and Tourism 33

CanadaUS

0 2 4 6 8 10 12 14

Exhibit 7 Canada has a similar mix of clusters to the United States

4 It is important to note that our measure focuses on the mix of clusters only. It estimates the productivity performance we could expect in Canada if each cluster were as productive as its US counterpart. 5 Institute for Competitiveness & Prosperity, A View of Ontario’s Clusters of Innovation, April 2002, pp. 18-206 Ibid. and Institute for Competitiveness and Prosperity, Missing opportunities: Ontario’s urban prosperity gap, June 20037 Missing opportunities: Ontario’s urban prosperity gap


• Scale reduces unit costs. Unit costs fall asthe local markets grow in size. With a strongcost position from a larger local base,firms can supply other cities and regions.

• “Thick” labour markets benefit workersand firms. Cities have a greater concentra-tion and variety of skilled personnel. Firmslocate in urban areas to draw on diversifiedpools of skilled labour. Likewise, individualshave a form of “labour market insurance”when they live in a city where there ismore than a single employer.8

Canada’s lower degree of urbanization hurtsour productivity compared to the US.

City regions of reasonable size are increasingly important drivers of economicactivity. Three factors interact to improveproductivity in urban areas:

• Network effects drive innovation. Closeproximity of people and firms increasesthe frequency and quality of social andeconomic interactions, which spur inno-vation. This innovation strengthens andpromotes the growth of the cluster, whichdraws more firms and people, whichproduces greater interaction, and so on.

There is a positive relationship betweendegree of urbanization and the labourproductivity of 60 jurisdictions in NorthAmerica (Exhibit 8). Urbanization is definedas the percentage of their population livingin city areas of greater than 50,000 people.For Canada it includes our 43 largest citiesranging in size from Toronto to Lethbridge.Our analysis indicates that we have a $3,200per capita disadvantage against the US. Thismakes low urbanization the largest negativecontributor to Canada’s productivity gap.

Exhibit 8 Urbanization drives productivity

Percent of Population in Urban Areas vs. Labour Productivity, 2001

Percent Population Living in Urban Areas

US

US states

Canada

Canadian provinces

0 20 40 60 80 100

Source: Statistics Canada, CANSIM, table 051-0014, 051-0001, 384-0002, 282-0002

Statistical Abstract of the United States: 2000. Available online at: http://www.census.gov/prod/www/statistical-abstract-us.html

US Bureau of Labour Statistics, State Employment. Available online at: http://data.bls.gov/labjava/outside.jsp?survey=la

US Bureau of Economic Analysis, Gross State Product. Available online at: http://www.bea.gov/bea/newsrel/gsp0503.xls

US - MSAs; Canada - CMA (adjusted to equate to US MSA definition)

180

160

140

120

100

80

60

40

20

0

Relative Labour Productivity (Canada =100)

8 E. Glaeser, “Demand for Density? The Functions of the City in the 21st Century,” The Brookings Review, Summer 2000, Vol. 18, No. 3


effective than the US in converting ournatural, physical and human resources intogoods and services.

Productivity gains countProductivity gains count not only becausethey would reduce the dominant portion ofthe prosperity gap; looking at the roadahead, productivity increases would alsoprovide the greatest leverage for a higher,sustainable GDP per capita. Productivity isthe only element that can improve in theshort-run and grow indefinitely. This can beachieved if our attitudes towards competi-tiveness, our investments, our motivations towork and hire, and our market and institutional structures combine to lead tothe innovation and upgrading that will raiseour productivity to US levels and eliminatethe prosperity gap.

The Institute has sought explanations for theprosperity gap and for ways to close it.We have looked at differences in attitudes tocompetitiveness and entrepreneurship.We have deepened our understanding ofconsumption-investment tradeoffs, examinedthe impact of tax policies on motivations,and considered how market and governancestructures affect our productivity.

Our main conclusion in this report is thatCanadian individuals, businesses, andgovernments are not investing enough oftoday’s wealth for tomorrow’s prosperity.To close the prosperity gap with the US, weneed to partner to reverse the wideningpattern of under investment that limits ourpotential for productivity gains.

Throughout this report, we elaborate on this key theme and our insights intosteps Canadians can take in partnering for prosperity.

Exhibit 9 Canada trails the US in educational attainment

Educational attainment of persons 25–64

Source: Statistics Canada, US Census Bureau

High school graduate

Some post-secondary /college graduate

Bachelor’s degree

Graduate / professional degree

Less than high school

CanadaUnited States

9%

17%

30%

28%

16%

7%

13%

43%

14%

23%

Lower educational achievement weakensour productivity. Most economists agreethat the level of education attained acrossthe workforce is an important determinantof the “quality” of an economy’s humancapital. Our analyses reinforce the positivecorrelation between productivity and wages.9

Economic studies also show repeatedly thatindividuals’ earnings increase with their level of education.10 In fact, the best single predictor of personal income is level ofeducational attainment.

Canada’s under performance in educationalattainment, mainly at post-secondary levels(Exhibit 9) translates into a negative impacton GDP per capita of $1,100 per capita.

Capital under investment is a drag onproductivity growth. In our work inOntario, we have identified under investmentin machinery and equipment in Ontario

compared to levels in US peer states as anissue.11 This under investment slowly erodesthe relative strength – levels and renewals –of our capital stock compared to that in the US. This erosion in turn reduces theproductivity of our labour and hence ourprosperity. For Canada, we estimate thisunder investment to be worth about $1,000 per capita in lost productivity andprosperity. Later, we discuss further thisunder investment and its possible causes,including the higher tax burden on capital.

The remaining gap of $3,300 relates to lowereffectiveness. We have been able to accountfor the impact of profile, utilization, andintensity on prosperity. We have alsoaccounted for the effects of several elementsof productivity. The gap that remains isrelated to productivity on the basis of like-to-like cluster mix, urbanization, educationand capital intensity. In sum, Canada is less

9 Task Force on Competitiveness, Productivity and Economic Progress, Closing the prosperity gap, November 2002, p. 2710 For a literature review of the rates of returns to education and results of their own calculations, see Vaillancourt and Bourdeau-Primeau in “The Returns to University Education in Canada, 1990 and 1995”, in Laidler,

D. (ed.) Renovating the Ivory Tower: Canadian Universities and the Knowledge Economy. C.D. Howe Institute Policy Study No.27 11 Closing the prosperity gap, p. 36 and Investing for prosperity, p. 25

A competitive rate of investment in humancapital and physical capital strengthens ourcapability for innovation and productivityenhancement. But Canadians invest less percapita than our American counterparts andthis results in the prosperity shortfallbetween us and the US.

Initially, we invest in much the same way asthey do. But then we stop investing for thelong term and instead increase our currentconsumption, while US individuals, firms,and governments keep right on investing. Infact, we do all the basics – and do them well.But, as the investment requirements becomehigher and more demanding, we tend to shyaway. The net result is that, in the balancebetween investment and consumption,Canadian spending is weighted more towardconsumption than that in the US, where ahigher percentage of total spending isinvested. This is true for Canadian individuals, Canadian businesses, andCanadian governments.

Canada’s under investment permeatesour economy Canada’s capacity for innovation andupgrading is built on an integrated set of four factors in the AIMS analyticalapproach (Exhibit 10):

• Attitudes towards competitiveness,growth, and global excellence

• Investments in education, machinery,research and development, and commer-cialization

• Motivations for hiring, working, andupgrading as a result of tax policies andgovernment policies and programs

• Structures of markets and institutionsthat encourage and assist upgrading and innovation

As we review our research findings to date,we see that under investment is the keydriver of our prosperity gap.

Prosperity

Attitudes

Structures Investment

Motivations

Source: Institute for Competitiveness & Prosperity

Exhibit 10 AIMS drives prosperity

Relative to our counterparts in the US, weunder invest in five important areas. IfCanadians do not break out of this patternand continue to be out invested, we run therisk of falling further and further behind –to the point where we cannot catch up andbe competitive.

Investment in education lags the USInvestment in education affects productivityand prosperity throughout our society. Mostresearchers who have analyzed Canada’s andOntario’s productivity challenge concludethat education is an important part of thesolution. A more educated and better trainedlabour force creates more value. The bestadvice parents can give their children is tostay in school. Every extra year of school andeach additional degree raise income prospectsfor individuals.12 While the economic returnsfrom each level of education are higher inthe US than in Canada, the data indicatesignificantly higher earnings from advancededucation in both countries.

For businesses, the increased availability ofskilled workers, researchers, and managers isa critical benefit of post-secondary education.For all of us, the ideas that spill out ofcolleges and universities improve and createproducts, services, and processes and lead tonew companies and whole new industries.

Our review of Canada’s investment ineducation shows that we under invest relative to the US and that this under investment is more pronounced as we movethrough the educational system. Our analysis includes funding by governments,individuals (students and donors), and others,except as noted. On a per capita basis,13

Canadians invest competitively in publicprimary and secondary schools (85 percentof US rates) and in colleges (90 percent).But university spending is at a much lowerrate – 50 percent of US spending per capita.

12 See Investing for prosperity, November 2003, p. 20 for an estimate of the returns to education by level of education13 Quebec’s spending is excluded at all levels because of the significant structural differences due to its CEGEP system

Canada under invests for tomorrow’s prosperity


Primary and secondary education investmentshows mixed results It is difficult to be definitive on whetherCanada’s relative under investment in K-12education is worrisome. The results achievedby students in Canada’s primary and secondary school systems are better thanthose achieved by their US counterparts.According to OECD data, the ratio of highschool graduates to the relevant age group in2000 was 78 percent in Canada versus 74 percent in the US. Through the 1990s,Ontario’s rank in the percentage of Grade 9students who ultimately graduate on timehas been in the upper half of its peer groupof US states and has been improving.

Canada’s students also perform well on standardized tests. Their results are generallyamong the highest in the world and exceedthose of students in the US.15 In addition, the

On a per student basis, the spending disparities widen in public primary andsecondary schools (81 percent of US rates)and colleges (86 percent), since Canada hasproportionately more of its populationenrolled as students in these levels. In effect,higher per capita investments do not go asfar at the level of spending per student. Atthe university level, because of our lowerparticipation rate, the spending gap narrowson a per student basis but is still only 63 percent of the US rate (Exhibit 11).Because Quebec’s secondary and post-secondary system is so different fromsystems in the rest of Canada and the US we have excluded their expenditures.14

disparity of results across schools is signifi-cantly lower in Canada than in the US, indicating our success at providing abetter quality education for a broader rangeof students.

Conversely, while Canada performs well atgraduating students on time, the Institute isconcerned about whether post-secondarystudents’ aspirations are competitive withthose of US students. Our concern aboutstudents’ aspirations is highlighted in findings from a recent report by the CanadaMillennium Scholarship Foundation16

reporting that 50 percent of Canadianstudents, who score in the top 40 percent onstandard achievement tests, including PISA,do not attend post-secondary programs.These findings reinforce our view thatCanadians need to be more successful inencouraging high school graduates to pursuea post-secondary degree, especially since thestudy uncovered that it was students’attitudes – and not financial barriers – thatdissuaded them from attaining higher levelsof education.

In fact, tuition fees are not a major deterrentto students considering pursuing post-secondary education. A recent StatisticsCanada study shows that over the pastdecade, the post-secondary participationrate gap between the students from low- andhigh-income families has actually narrowed.Further, when high school graduates wereasked the main reason for their decision notto go to go on to college or university,77 percent of respondents listed a non-financial reason.17

Exhibit 11 Canada’s spending lags the US’s at all levels of education

Canada (excluding Quebec) as %of US total expenditure 1995-99, C$ (2000)

Per Capita Per Student

* Note: Ontario results within national data were adjusted according to Ontario Ministry of Training,

Colleges and Universities results.

Source: Statistics Canada, Ministry of Training, Colleges and Universities; National Center of Education Statistics –

Digest of Education Statistics

K-12 College* University K-12 College* University

8590

50

8186

63

US=100

0

20

40

60

80

100

120

14 If Quebec data were included, Canada’s spending relative to theUS on a per capita basis would 81 percent (K-12), 118 percent(College) and 51 percent (University). On a per student basis theresults are 82 percent (K-12), 93 percent (College) and 63percent (University).

15 See Investing for Prosperity, p. 22 and Missing opportunities:Ontario’s urban prosperity gap, p. 28

16 Canada Millennium Scholarship Foundation, “Ready or Not?Literacy Skills and Post-Secondary Education,” September 2003.


while Canada invested only $436.18 This gapnarrowed somewhat on a per student basis,because Canada has fewer people attendinguniversity as a percentage of its population.The result is that, over the 1995-99 period,Canadian universities spent a total of$19,60019 per student annually, while USuniversities spent $31,200 per student20 – a yearly difference of $11,600 per student.Combining tuition21 and governmentfunding,22 the differences between Canadaand the United States are not large, account-ing for a quarter of the difference in perstudent spending.

The major difference is in the additionalrevenues to US public and private universi-ties from private gifts, donations, andendowment income and from other revenuegenerating activities. Private donors invest ata much higher rate in US schools than inCanadian schools. These investmentsincreased capacity to spend at US publicschools by $2,000 per student, and by $9,400per student at private schools, or $4,600across the two systems. Canadian data fordonations by private individuals and endow-ment income are not available, but they arebelieved to be relatively modest in compari-son. On average, endowment assets in theUS per full-time student are $186,000 atprivate universities and $20,000 at publicuniversities. The average endowment forCanadian universities is under $8,000.23

Post-secondary education investments showimportant weaknesses Investments in post-secondary education inCanada have grown at a moderate rate since1995, but have not gained ground relative toinvestments made in public and privatepost-secondary institutions in the US.

A major difference in the educational strategy of Canada and the US is the diversity of public and private universitiesand colleges there. This diversity creates theopportunity for higher levels of privatefunding in institutions, which has led tosubstantially higher levels of investment on aper student basis as well as a proportion ofGDP. While Canada may be investing atclose to competitive levels when only publicinstitutions are considered, our lack ofprivate universities has constrained investment in this critical prosperity driver.At the college level of post-secondary education, over the 1995-99 period, Canada(outside of Quebec) invested at 90 percent ofthe US rate on a per capita basis and 86percent of the US rate on a per student basis.

At the university level, the differencebecomes more pronounced as investmentper capita and per student are dramaticallybelow US levels. Per capita, the US outinvested Canada by a margin of 2 to 1. Onaverage between 1995 and 1999, the USinvested $875 per capita in universities,

The other source for US universities is theiraccess to a wider range of related revenue-generating activities (in hospitals and otheroperations) totaling $5,900 per student inthe US versus $1,00024 in Canada.

Attainment of degrees in Canada lags USWe have seen that a smaller percentage ofCanadians have university degrees thanAmericans. Most recently available informa-tion for the latter half of the 1990s indicatesthat we are not closing this gap. In degreesconferred per 1,000 population Canadatrailed the US – 5.02 versus 6.20 in the 1997-98 academic year. At the bachelor’slevel the gap was much smaller – 4.16 inCanada versus 4.42 in the US. At the Ph Dlevel the difference was almost non existent– 0.13 versus 0.17. The largest source of the attainment gap is at the master’s degree.

In Canada, 0.73 master’s degrees weregranted per 1,000 population, less than halfthe 1.61 rate achieved in the US (Exhibit 12).

17 Canada Millennium Scholarship Foundation, “Why Don’t They Go On? Factors Affecting the Decisions of Canadian Youth Not to Pursue Post-Secondary Education,” 2001.18 Operating and capital expenditures, excluding ancillary enterprises (e.g., bookstores, athletics, residences) 19 Including Quebec20 In US public universities (64.7 percent of students) the per-student spending is $28, 200 and in private universities

(35.3 percent of students) the spending is $36, 500. Note that results include capital and operating spending, but exclude ancillary expenditures (e.g., residences, dining halls, and athletics).21 Average tuition at US public universities in 1999-2000 was $5,600 and at private universities it was $17,800 (current Canadian dollars) – the weighted average was$11,500;

Canadian tuition was $4,200 22 Government revenue was $14,400 per student at public

universities and $6,100 at private universities – the weighted average was $9,900; in Canada government revenues per student were $14,400.23 Based on survey results of four-year colleges and universities in the US and universities in Alberta, Ontario, and Quebec conducted by US-based National Association of College and University Business Officers. 24 Including gifts, donations and endowments


investment. The machinery and equipmentcomponent includes new innovative technology and software – a key driver ofproductivity growth.

Examples of machinery and equipmentinvestment include a company building a newfactory assembly line or retooling an existingone, a bakery buying a new oven, or a govern-ment agency buying new computers for anairport. In 2002, 61.5 percent of all newcapital investment in Canada was in machin-ery and equipment, up from 43.6 percent in1981. Structural investment comprises non-residential infrastructure – including thebuilding of a new factory or a warehouse, andengineering construction investment such ashighways, railways, and bridges.

There is a positive and statistically significant relationship between investment

Our US counterparts out invest us at thebachelor’s level and the investment gap widensalong the upper education spectrum, espe-cially at the level of “terminal master’s” – thefinal degree for the vast majority of its holdersbefore they enter the economy and contributeto enhancing productivity. In sum, Canadainvests substantially less in post-secondaryeducation than the US and this under invest-ment reduces our productivity and prosperity.

Canada also trails in productivity-enhancing capital investmentsAnother critical area of investment is theacquisition of new physical assets or therefurbishment of existing ones. This capitalinvestment – in machinery and equipmentand in structures – enables workers to bemore productive, giving them newer andbetter tools to do their work. Innovation andupgrading are typically embedded in new

in machinery and equipment and growth inGDP per worker – our standard measure ofproductivity.25 The correlation betweenproductivity and investment “holds overlong historical periods, as well as in recentones, in both developed and developingcountries.”26 Infrastructure investment,while adding to productivity, is consideredby economists to have less impact thanmachinery and equipment investment.

Canada’s private sector has consistentlyunder invested in machinery and equipmentcompared to US counterparts The private sector in Canada accounts forjust over 84 percent of all capital investment,and 91 percent of machinery and equipmentinvestment. Canada’s private sector invest-ment dropped from 16.1 percent of GDP in1981 to 12.8 percent in 2001. In machineryand equipment, private sector investment

US

Canada

Exhibit 12 University degree attainment is higher in the US than in Canada

Degrees per 1,000 population (1997–98)

Source: Statistics Canada (2002) Educational databases, data commissioned by the Institute for Competitiveness & Prosperity; CANSIM II Table 051-001, (population);

US Department of Education, National Center of Education Statistics, Digest of Education Statistics 2001, Tables 255-7; US Census Bureau, Census 2000; Institute for Competitiveness & Prosperity

Total Bachelor’s Master’s

5.02

6.20

4.164.42

0.73

1.61

PhD

0.13 0.17

7

6

5

4

3

2

1

0

25 J. Bradford Delong, Lawrence H. Summers, “Equipment Investment and Economic Growth” 1995. Source: http://www.j-bradford-delong.net/pdf_files/QJE_Equipment.pdf

26 R. Harris, “Determinants of Canadian Productivity Growth: Issues and Prospects”, Discussion Paper # 8, Industry Canada, 1999


Public sector capital investment in Canada isfalling behind US levels While a smaller part of total investment,public sector capital investment is still aneffective driver of growth in an economy. Formost of the past two decades, Canada’spublic sector out invested the US publicsector,27 but since 1996 it has fallen behind.

Public sector structural investment inCanada, between 1981 and 1995, held a slightadvantage over the US. Since 1995, we haveseen the US spend about 14 percent moreper dollar of GDP. As of 2001, Canada’spublic sector invested 1.6 percent of its GDPon structural capital, while the comparableUS investment was slightly above 1.8 percent.For machinery and equipment, governmentsin Canada invested slightly more than thosein the US between 1981 and 1995. In 1981,Canada’s public sector investment stood at

has been consistently lower in Canada thanin the US (Exhibit 13). Since 1981, Canada’sprivate sector has trailed the US in machin-ery and equipment investment by an averageof 12.0 percent in dollars per GDP. If just thepast decade is examined, the gap is evenlarger – an average of 16.1 percent. Thisannual investment gap has a strong cumula-tive effect. Over the twenty-year period, ifthe US private sector machinery and equip-ment rate were matched, Canada’s capitalstock would have been almost $75 billiondollars higher. Canada’s private sectorcontinues to fall behind in this importantdriver of business growth.

Canada’s private sector has out invested theUS in structures, but this slight leadnarrowed from 2.8 percent of GDP in 1981to 1.5 percent in 2001.

0.6 percent of GDP, while in the US it was0.5 percent. In 1995, the US caught up toCanada, with both having an investment rateof 0.8 percent of GDP. Since then, while ourinvestment rate has remained flat at 0.8percent of GDP in 2001, the US rate hasincreased to 0.9 percent or about 14 percentmore in dollars per GDP.

Under investment is costlyWe estimate that under investment inmachinery and equipment costs Canadiansnearly $1,000 in lost GDP per capita. GDPgrowth is driven by growth in labour hours(which are driven by profile, utilization, andintensity) and growth in productivity. One ofthe key factors driving productivity is theamount invested in machinery and equip-ment. If Canada’s private sector had keptpace with the US machinery and equipmentinvestment since 1981, our total investment

Exhibit 13 Canada’s capital investment trailed the US in the last decade

Private Sector Machinery & Equipment Investment as % of GDP

US

Canada

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

10

9

8

7

6

5

4

3

2

1

0

Source: Statistics Canada; most recent US Department of Commerce and Bureau of Economic Analysis Data; Institute for Competitiveness & Propserity Analysis

%

27 US military expenditures are excluded from public sector investments.


Why is Canada’s capital investment lower? A2002 study published in the InternationalProductivity Monitor29 offers two possiblereasons for Canada’s poor performanceversus the US in manufacturing investment:the lower cost of labour, and the higher costof importing equipment. The study foundthat, between 1994 and 2000, the cost oflabour relative to capital increased by 1.7 percent per year in Canada compared with 4.6 per cent in the US. At the same time, theCanadian dollar depreciated significantly,increasing the price of imported equipment.This gave Canadian firms less incentive toincrease their capital investment comparedto their American counterparts, and madethe cost of investment higher. We alsodiscuss later the added de-motivating impactof Canada’s higher tax burden on capital.

Spending by governments in Canadahas shifted from investment toconsumption over the last decadeGovernment expenditure is a criticalcontributor to upgrading and innovation.

would now be 4.3 percent higher, and weestimate that this higher level of investmentwould have raised productivity and prosper-ity by just under $1,000 per capita.

The impact of our lower capital investmentrate could be much higher. The approachjust described looks only at private sectorunder investment in machinery and equip-ment since 1981 because of limitations inaccess to reliable comparative data. Anotherapproach is to look at the overall level ofcapital invested per labour hour versus theUS and to estimate growth in GDP percapita if we were to match US results.

Using a method developed by AndrewSharpe28 at the Centre for the Study of LivingStandards, we estimate that if we invested atthe same level per labour hour as the US, thelabour productivity gap would decrease by 30percent based on 2001 data, translating to anincrease of about $2,200 in GDP per person.

We recognize that governments also have animportant role in consumption expendituresthat help secure an adequate quality of lifefor all Canadians. We think it is important,however, that governments achieve anappropriate balance between consumingcurrent prosperity and investing for futureprosperity. We do not prescribe the exactbalance between the two – but relative to theUS, governments in Canada have shiftedaway from investment expenditures towardsconsumption.

Governments at all levels in Canada and inthe US direct approximately 30 per cent oftheir total spending to a combination of debtservice, basic government administration,environment, and protection. In allocating theremaining 70 per cent, a tradeoff betweenconsumption and investment occurs. Tocompare trends in how governments inCanada and the US made this tradeoff, weclassified government expenditure byconsumption (e.g., health care and social serv-ices) and investment (e.g., education, trans-

Exhibit 14 Governments in Canada have shifted spending from investment to consumption

Consumption and Investment Expenditures per capita C$ 000 (2000)

Canada US

Source: Institute for Competitiveness & Prosperity based on data from Statistics Canada, Public Sector Statistics 2000–2001 (table 2.2); US Census Bureau,

Statistical Abstract of the United States: 2001, 121st edition (table 463); Institute for Competitiveness & Prosperity analysis

1992 2000 1992 2000

0.55Investment/

Consumption Ratio: 0.50 0.52 0.54

InvestmentConsumption

-9%

-17%

+8%

+12%

0

6

12

2

8

$14

4

10

28 Andrew Sharpe, “Why are Americans More Productive Than Canadians?” 2003, Centre for the Study of Living Standards (CSLS). 29 J. Bernstein, R. Harris, A. Sharpe; “Explaining the Widening Canada-US Productivity Gap in Manufacturing,” International Productivity Monitor #5, 2002.


Higher prosperity in the US allowed theirgovernments to have lower tax rates thanCanada and still spend more per capita inconsumption, investment, and other areas.

Without addressing this under investment, itis unlikely that Canada will be able to makesubstantial progress in raising our productivity.

Under investment in immigrant integra-tion limits our competitive advantage Canada has an important competitive advan-tage over the US – the arrival of more andmore highly skilled immigrants. StatisticsCanada data indicate that over 60 percent ofrecent immigrants are trained as profession-als or in skilled trades, admitted to Canadain large part for their levels of educationalattainment and skills. This is a result ofCanada’s competitive immigration strategy.Results from the 2001 census indicate thegrowing importance of immigration to ourpopulation. Overall, 18.4 percent of Canada’sresidents were born outside Canada. A thirdof residents within metro areas are immi-

portation, communication, and housing).In 1992, our governments in Canada spent55 cents on investment for every dollar ofconsumption spending similar to the experi-ence in the US at 52 cents for every dollar ofconsumption spending (Exhibit 14). By 2000,this ratio dropped to 50 cents in Canada,while it rose to 54 cents in the US. On a percapita basis, since 1992, governments in bothCanada and the US have sustained relativelythe same level of consumption expenditure.However, governments in Canada reducedpublic investment expenditure, while in theUS governments chose to increase per capitainvestment spending.

Through the 1990s, government spending asa percentage of GDP declined in Canada andthe US. In Canada, government spending fellfrom 55.9 percent of GDP to 40.1 percent in2000, while in the US the decline was from37.9 percent to 33.8 percent. On a per capitabasis, the US actually increased spending bygovernments, while in Canada per capitaspending fell over the 1992-2000 period.

grants (in the Toronto Census MetropolitanArea, 43.4 percent). According to HumanResources Development Canada,30 fully 71percent of our labour force growth inCanada was from immigration in the period1991 to 1996, with immigrants expected tocontribute 100 percent of labour forcegrowth by 2011. More than half – 55 percent– of all new immigrants choose to reside inOntario, mainly in our cities. Researchconducted by Richard Florida and MericGertler,31 found two key features of Canada’scities – the relatively high proportion ofimmigrants and the relatively low propor-tion of university degree holders. Ironically,we are not capitalizing on the strength inimmigration to overcome our talent deficit.

Immigration raises our educational attain-ment levels (Exhibit 15). A higher percentageof immigrants than Canadian-born individ-uals have post-secondary education. Thelatest Statistics Canada data reveal that in2000, 44 percent of recent immigrants in theworkforce held a university degree compared

Exhibit 15 Immigration increases educational achievement in Canada’s workforce

Level of educational attainment, 2000

% of labour force aged 16–64

Highestlevel ofschooling

Note: Recent immigrants arrived in the previous five years and the sample consists of individuals aged 16-64, who worked at least 40 weeks and with positive earnings

Source: Statistics Canada, “Will they ever converge? Earnings of immigrant and Canadian-born workers over the last twp decades,” 2003.

Less thanHigh School

High School

College

Bachelor’sdegree

Canadian-born

Recent immigrantsMaster’sdegree

Doctorate

0 5 10 15 20 25 30 35 40

30 Denton, Feaver, and Spencer, Immigration Labour Force and the Age Structure, Human Resources Development Canada, 199931 Richard Florida and Meric Gertler "Competing on Creativity: Placing Ontario's Cities in North American Context," December 2002, available on Institute’s Web site, www.competeprosper.ca This report includes

results for Canadian cities outside Ontario.


between immigrants and native-bornCanadians that needs to be closed.One difficulty in capturing the full potentialof immigrants is that employers and accredit-ing bodies are often unable to assess priorlearning effectively. Consequently, immigrantsoften find that their educational credentialsare undervalued or not recognized at all.Accreditation can be a lengthy and costlyprocess, too often resulting in immigrantshaving to re-study their trained profession.Instead, to support themselves and theirfamilies, many take jobs for which they areover-qualified; the immigrant doctor or engi-neer taxi driver is increasingly commonplace.

As a result, we are forgoing opportunities toenjoy the true economic value of immigra-tion. For example, The Maytree Foundationhas pointed out the high investment alreadymade in other countries to train physicians –seven years’ post-secondary education andtwo years’ training in hospitals – can savewell over $100,000 for government treasur-ies. They argue that a key barrier to realizingthis economic potential is the overly strictcredential standards imposed by provinciallicensing bodies. And The Conference Boardof Canada has estimated that, if the problemwere eliminated for immigrants and others,overall Canadian income would be between$4.1 and $5.9 billion higher.36 This improve-ment would be the result of lowering unem-ployment and underemployment as we addbetween 33,000 and 83,000 post-secondarycredential holders to the ranks of Canada’sskilled workers. This earnings gap representsa missed economic opportunity for all ofCanada, as well as increased social costsfrom higher incidences of poverty andgreater dependence on social services.

to only 19 percent of native-born Canadians.In contrast, immigration to the US bringsdown their educational achievement average.

Educated immigrants to Canada counteractthe “brain drain” of Canadian educatedpeople to the US by a margin of four toone.32 Yet Canadians are missing out on thispotential “brain gain” opportunity as manyimmigrants have difficulty entering theprofessions and careers they once held.According to data from Status of WomenCanada, just over half of foreign-trainedprofessionals are working in professions ortrades three years after immigrating. A 1996study concluded that in Toronto “immigrantssettle for jobs in the accommodation, foodand beverage sector because entry costs arelow, skill requirements are minimal, and otherjob opportunities are not available to them.”33

More recent information indicates thispattern has not improved. Based on 2001census data, the earnings of recent immi-grants relative to those of the Canadian-bornhave deteriorated sharply. In 2000, the ratioof employment earnings of immigrants oneyear after landing and Canadian bornworkers stood at 61.8 percent. For immi-grants who had been here ten years the ratiowas 83.5 percent.34 These results have deteri-orated sharply, compared to the progress ofearlier immigrant cohorts in the 1980s andearly 1990s who gained closer parity morequickly. They tell us that immigrants are nowtaking longer to integrate into the Canadianeconomy. Other work by Human ResourcesDevelopment Canada and Statistics Canadaindicates this gap exists mainly amonguniversity-educated immigrants.35 Overall,this earnings gap points to a productivity gap

But we are beginning to see success stories.The Ontario Ministry of Training Collegesand Universities is committed to helpingskilled newcomers reach their full potentialin the provincial economy without duplicat-ing education and experience gained outsideCanada. Bridging programs are part of this.For example, The University of Toronto’sFaculty of Pharmacy, with provincialfunding, has implemented its InternationalPharmacy Graduate (IPG) Program as ameans of assisting foreign-trained pharma-cists to meet Canadian standards of practicein a timely manner. Creating Access toRegulated Employment for Nurses (CARE)is another pilot bridging project funded bythe Ontario government to assist interna-tionally trained nurses gain access to theprofession in Ontario.

Governments, educational institutions, licens-ing bodies, and the professions need topartner together to develop more programslike these to close skill gaps. This is increas-ingly important given that numerous studieshave shown that the first job immigrants holdafter immigrating can trap them in positionsof underemployment.

32 Andrew Brouwer, Immigrants need not apply, Caledon Institute of Social Policy33 CERIS – Toronto & Metropolis, Immigrants’ Economic Status in Toronto: Rethinking Settlement and Integration Strategies, 2002.34 Statistics Canada, 2001 Census: analysis series – Earnings of Canadians: Making a living in the new economy.35 Human Resources Development Canada, Immigrant Occupational Skill Outcomes and the Role of Region-of-Origin-Specific Human Capital; Statistics Canada, Earnings of Canadians: Making a living in the new

economy, 2001.36 Michael Bloom & Michael Grant, Brain Gain, The Economic Benefits of Recognizing Learning and Learning Credentials in Canada, The Conference Board of Canada, 2001.


The Institute’s research also identified barri-ers to urban prosperity in some of the keyfiscal and governance structures. Canada’smetro voters are under represented in theHouse of Commons, tilting decision makingaway from urban perspectives that couldencourage higher productivity. Furthermore,municipal governance structures are inade-quate to support a significant expansion oftaxing and spending authority – whichmight improve prosperity by putting govern-ment power closer to the people.

Canadians – individuals, businesses, andgovernments – are under investing relativeto our US counterparts. Further examina-tion of the other elements of AIMS offersexplanations about why this gap exists.

Under investment in our city regionscontributes to the prosperity gapLow urbanization, through its negativeimpact on productivity, accounts for a signif-icant part of the productivity gap. Threefactors interact to increase productivity inurban areas: network effects that drive inno-vation, larger scale that reduces unit costs,and thick labour markets that benefitworkers and firms. Because of this strongrelationship, the Institute investigated urbanprosperity further37 and confirmed thecontinuing importance of urbanization tothe prosperity gap.

One of the most surprising findings fromthese investigations is that in Ontario itsprosperity gap versus its peers is in the cityregions, not the rural areas. GDP per capitain Ontario’s metro areas in 2000 was 12.8percent lower than metro areas in a peergroup of 14 US states. Outside metro areasOntario’s GDP per capita was actually 3.0percent higher than the non-metro areas inthe peer states. This finding is likely consis-tent with results for Canada versus the US.

On the one hand, Canada’s urban areas havea strong foundation for innovation and pros-perity.38 Our cities have the advantages ofattracting educated immigrants and foster-ing an environment for the “creative class,”both of which are required for a vibranturban economy. But, on the other hand, oururban residents had lower educationalattainment than those in the US. TheInstitute’s research indicates this lowereducational attainment contributes to ourlower productivity and prosperity.

37 Missing opportunities: Ontario’s urban prosperity gap, June 2003. 38 Florida and Gertler "Competing on Creativity” 2002, available on Institute’s Web site: www.competeprosper.ca

preneurial spirit, and creativity are importantdrivers of economic success. In 2003 theInstitute conducted research into attitudesamong the general public and businesscommunity in Ontario and 11 of the statesin its peer group.39 The Institute concludedthat attitudinal differences between thepublic and business in Ontario and the peerstates are not significant roadblocks toclosing the prosperity gap. In contrast tocommonly held perceptions, we differ verylittle from our counterparts in how we viewbusiness and business leaders, risk andsuccess, and competition and competitiveness.

While the survey results are for Ontario andsome of the larger US states, there is nothingto suggest that results would be dramaticallydifferent between English Canada and theUS overall.40 With this caveat, survey resultsindicate that, across numerous dimensions,attitudes among the general population andbusiness people in Canada and the US arevery similar.

Motivations and Structures appear todrive our under investment behaviourIn the last year, the Institute conductedmajor surveys to test the hypothesis thatOntarians’ attitudes to business and entre-preneurship are the significant cause ofunder investment and our prosperity gap. Infact, our research indicates that attitudinaldifferences between Ontarians and peer stateresidents are minimal and not a significantroadblock to prosperity. We believe thisconclusion would hold across the country.

Next we look at other research we conducted,using the AIMS analytical approach thatpoints to other factors that likely explain theunder investment pattern: our motivations,as represented by marginal effective tax rates,and market and governance structures.

Minimal attitudinal differences are nota significant roadblock to our prosperityAttitudes that lead to high aspirations, self-confidence, the desire to succeed, the entre-

Few, if any, differences exist in the way thegeneral public views business and businessleaders. Attitudes towards risk and successare very similar among the public and business people. And there is little differencein attitudes towards competition and factorsof competitiveness.

The survey did identify two importantdifferences in attitudes: we are less likely torecommend post-secondary education toour high school graduates; and we are morelikely to recognize and welcome the economicbenefits of immigration.

Importantly, Ontarians are more likely torecommend a college diploma as the highestlevel of education to achieve; their counter-parts in the peer group are more likely torecommend a bachelor’s or graduate degree(Exhibit 16). These attitudinal differencesmatter, given the importance of post-secondary education, specifically at higherdegree levels, to personal income and overall

Exhibit 16 Americans place more value on university education

Respondents’ choice of advice of level of education to achieve

Source: Institute for Competitiveness & Propserity Analysis

General Public

High SchoolDiploma

College orTechnicalDiploma

UniversityBachelor's

Degree

Professionalor Graduate

Degree

Business Community

High SchoolDiploma

College orTechnicalDiploma

UniversityBachelor's

Degree

Professionalor Graduate

Degree

US Peer StatesOntario50%

25%

0%

Motivations and structures hinderinvestment for the future

39 Striking similarities: Attitudes and the prosperity gap, Sept. 2003 40 Ontario represents 38 percent of Canada’s population and the 11 peer states represent 39 percent of the US population. In addition, results for urbanized areas versus rural areas are similar – projecting from more

urbanized Ontario and peer states to less urbanized Canada and the US is probably safe.


expenditures in areas such as infrastructureand education can help establish the founda-tion for businesses and individuals to increaseproductivity. The appropriate level ofconsumption expenditures is an importantdeterminant of our quality of life. Theseexpenditures also reduce the cost of doingbusiness, as governments take on some of theseexpenditures from individuals and businesses.

At the same time, taxes that are necessary tofund these expenditures can act as de-moti-vators to work, investment, and entrepre-neurship. Governments need to balanceexpenditures and taxes on an ongoing basisto ensure competitiveness and to make surethat citizens are receiving an adequate levelof services. Given our 12 percent shortfall ininvestment, the challenge is also to trade offspending on current consumption againstlong-term capital investment.

One means of assessing this tradeoff, espe-cially as it relates to competitiveness, is to

productivity. The lower educational aspira-tion undermines our potential for increasingGDP per capita and other prosperity gains.

This is one of the most significant findingsin the attitudinal research. It is consistentwith other research findings on educationalaspirations. It is likely an importantcontributing factor to our educational underattainment, which accounts for about $1,100of our prosperity gap.

If attitudes do not explain this under investment, then what might? How canCanada raise productivity to close the prosperity gap?

Governments need to address thewidening disadvantage in Canada’seffective tax burden – a critical aspectof motivationsGovernments face a balancing act in creatingthe fiscal environment for competitivenessand prosperity. Government investment

calculate marginal effective tax burdens onlabour and capital. This approach calculatesthe effective impact of taxation on the cost ofdoing business by taking into account all thetaxes paid, net of public subsidies, on allfactors used in producing goods and serv-ices. The approach takes taxes as a cost ofdoing business, based on the assumption thatbusiness will consider these costs as one ofthe factors in investment location decisions.

Canada has a widening tax disadvantageversus the USInternational tax expert Jack Mintz hasconcluded that Canada had a significant taxdisadvantage versus the US, particularly oncapital (Exhibit 17).41 Given the importanceof taxes on motivations and of the change intax policies in Canada and the US since hisoriginal analysis, the Institute engaged Mintzand Duanjie Chen,42 to track changes in taxburdens in Canada, as represented byOntario, and the US as represented by fivestates – California, Georgia, Illinois,

Exhibit 17 Ontario’s tax disadvantage widened in 2003

Marginal Effective Tax Burdens

Capital Labour

Note: US ranges are as follows: Tax on Capital, 2002: 12.9%–18%, 2003: 11.4%–16.3%; Taxes on Labour, 2002: 16.1%–20.6%, 2003: 15%–19.8%

Source: Duanjie Chen & Jack Mintz, Assessing Ontario’s Fiscal Competitiveness, Available at: www.competeprosper.ca

2002 2003 2002 2003

Ontario5 State Median

14.5

2.1x

29.8

12.7

2.3x

29.0

17.2

1.4x

25.0

16.0

1.5x

24.7

0

5

10

15

20

25

30

35

41 Jack Mintz, Most Favored Nation: Building a Framework for Smart Economic Policy, C.D. Howe Institute Policy Study No. 36, 200142 Their report, Assessing Ontario’s Fiscal Competitiveness, is available on the Institute’s Web site, www.competeprosper.ca


43 D. Chen and J. Mintz, Taxing Investments: On the Right Track, But at Snail’s Pace, C.D. Howe Institute, Backgrounder No.2744 The US tax code permits inventory costs to be written off using the last-in-first-out (LIFO) method while Canada permits the first-in-first-out (FIFO) method. LIFO results in higher costs for tax purposes and thus

lower taxes when inflation exists, even in mild form. FIFO is advantageous in times of deflation.45 Tax analysts also look to the highest marginal personal income tax rate as a measure of tax competitiveness. The top rate in Massachusetts is 38.3 percent (taking into account deductibility of state taxes against

federal taxes) on income above US $312,000. Ontario’s top tax rate is close to 47 percent applied to income above US$70,000.

Massachusetts, and Michigan. While theanalysis is at the provincial and state levels, itincludes federal taxes and so is representa-tive of the national situations.

They conclude that “Ontario’s fiscal positionrelative to similar US jurisdictions compet-ing for jobs and capital is not at all competi-tive.” Their work indicates that today’seffective tax burden on all costs is 25.4percent, 10.4 percentage points above themedian of 15.0 percent in the five states.This difference has grown from 9.6 percent-age points in 2002, when Ontario’s rate was25.9 percent and the median of the fivestates was 16.3 percent.

This increase is the result primarily of awidening gap on taxes on capital during2003, but also in taxes on labour. Marginaleffective taxes on capital in Ontario are 29.0percent – more than twice as high as themedian rate of the fives states analyzed. Thegap is higher than in 2002. Taxes on labourare 24.7 percent, about 50 percent higherthan the median in the five states. As withtaxes on capital, the gap widened in 2003.

Far from “a race to the bottom,” as someobservers describe tax reductions in Canadaand Ontario, we still have meaningfullyhigher marginal effective tax rates thanleading highly industrialized US states. Moreimportant, the gap is widening.

Why is the effective tax burden on capital so high? Taxation on capital is particularly importantto productivity as it affects investment inupgrading and innovation. Drawing on theresults of this study and other work theyhave done,43 Mintz and Chen conclude that,“Ontario is a distinctly poor environment inNorth America for capital investments.”

Their conclusion that effective tax burdenson capital are above US rates is counter-intuitive, given that the statutory tax rate forlarge corporations is 36.6 percent in Ontario,which is below the average rate of 39.5percent in the US. However, concentratingon statutory rates masks many other subtlebut important factors including:

• The US provides a more generous deduc-tion for capital cost allowances (deprecia-tion), sharply reducing the after-tax cost ofinvestments in machinery and equipment

• The US provides bonus depreciation forcapital investments that reduces the effective tax rate on capital by almost 4 percentage points

• The US treatment of inventory costsresults in lower tax rates than in Canada44

• Capital taxes are much higher in Ontariocompared to those in the US; onlyMassachusetts has a capital tax among thefive states analyzed

• Sales taxes on capital goods in the UStend to be somewhat lower than inCanada for most industries.

Surprisingly, other factors play a minor rolein explaining differences in effective taxes.

• While provincial and federal tax creditsfor research and development are moregenerous in Canada, much of that advan-tage is offset by US research grants tobusinesses, particularly in the transporta-tion and communications industries

• Infrastructure spending by governmentson transportation and communicationnetworks that improve the productivity of

businesses (and excludes governmentbuildings) is actually higher in the USthan in Canada

Why is the effective tax burden on labour so high? Labour accounts for almost 80 percent of costsin our economy and so differences in taxeson labour are important to the overall costof taxes. Mintz and Chen identify three factors.

First, personal taxes are higher in Ontariothan in the five states, both on average andat the top marginal rates. The averagepersonal income tax rate in Ontario acrossall workers and industries is 29.4 percent,between 5 and 9 percentage points higherthan in the five peer states.45

Second, federal and provincial sales andexcise taxes are more than twice the rate ofsales taxes in the five US states analyzed.Since Ontario workers must cover thesecosts when they consume goods and serv-ices, their effective wages are lowered orbusinesses are forced to pay higher wages.

Third, employer payroll taxes, net of bene-fits, particularly federal employment insur-ance and Ontario’s Education and HealthTax, are higher than in the US. Essentially,Canadian programs take in more revenuethan they spend in benefits and are in effecthigher taxes than in the US.

Offsetting these higher taxes are the higherhealth and education expenditures by theOntario and federal governments. Publiclyfunded healthcare benefits are significantlyhigher for workers in Ontario. Mintz andChen calculate that the health subsidy for anOntario manufacturing worker earning$60,000 is close to $3,000 annually. Never-theless, the higher health care subsidy in


Fiscal and governance structural elementshamper prosperity gains Urban prosperity is negatively affected bypublic structures in two ways.46

First, Canada’s fiscal framework transfersresources from “have-provinces” to otherparts of the country at about double the rateexperienced in the US. One of our concernsis that these transfers do not seem to behaving a significant impact in reducingregional disparities in the Canadian federa-tion. While it may be unrealistic to assumethat change can be effected here, we can atleast understand that these transfers are acost to Canada’s prosperity. We should seekopportunities for innovation in Canada’sfiscal framework that preserve the concept ofsharing inside the federation and strengthenboth national and regional prosperity.

Second, our political governance structuresinadequately represent urban voters. In thefederal legislature, if rural and urban votershad equal representation, urban voters would

have 16 more of the 301 seats in the House ofCommons. The average city region seat has98,512 voters, while the average rural seat has80,112 voters (based on 1991 census). As withCanada’s fiscal framework, we acknowledgethat change is unlikely in the near term. Wecan only observe that, by inadequately repre-senting our urban areas – the source of pros-perity and productivity – representation inour current political structure is not likelycontributing as fully as possible to Canada’sproductivity and prosperity.

Clusters of traded industries may be underperforming Earlier in this report we concluded that ahigher share of Canada’s employment was inclusters of traded industries versus the US .We discussed how the mix of clusters repre-sents an advantage for Canada. What’sbecoming clearer now is that the quality ofour clusters may mean that they may not becontributing to Canada’s productivity andprosperity as much as they could.

46 Missing opportunities, pp 36-40.

Context forFirm Strategyand Rivalry

Related andSupportingIndustries

DemandConditions

Factor (Input)Conditions

Source: Porter, Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School

Exhibit 18 Cluster strength is the result of 4 interrelated factors

Ontario is insufficient to offset the disadvan-tage in the effective tax rate on labour costs.

Potential tax reforms could improve motivations – and productivity Mintz and Chen conclude by identifying andassessing possible tax reforms. Recognizingthe limited fiscal room to maneuver, theyfocus on reforms that reduce marginal effective tax rates with the least possible taxrevenue reduction.

Rethinking taxation strategy in Canada isone important way to begin to exploreopportunities to increase investment andclose the prosperity gap. Another way is toconsider encouraging changes in market andgovernance structures that are holding us back.

New market and governance struc-tures can support investments forinnovation and upgradingThe under investment trap appears to be asignificant challenge for Canada in closingthe prosperity gap. We have seen that the de-motivating feature of uncompetitive taxescontinues to be a part of the explanation ofthis under investment. In this section, weturn to structures – the final element ofAIMS – to understand their effects onproductivity and to explore the opportunitiesthey may offer for innovation and upgrading.

In the past year, we completed a thoroughassessment of public governance structures andtheir impact on urban prosperity. We concludethat these structures did not contributeadequately to urban Canada’s overall produc-tivity and prosperity. Our work in the area ofmarket structures is less complete, but weare hypothesizing that they may not enhanceour capacity to innovate and upgrade. And,while our attitudes are consistent with aspi-rations for world-class productivity andprosperity, our clusters of traded industriesmay not be as vibrant as those in the US.


develops the more talented players. Coachingis better in Canada. While both boys areplaying the same game and are highlycompetitive in their respective leagues, theintensity of the competition they each face isquite different. That’s why many younghockey players from the US and Europecome to play in one of Canada’s juniorleagues as a way to hone their skills and“prove” themselves for the NHL.

Some observers conclude that, despite freetrade agreements, some of Canada’s leadingindustries, such as financial services,telecommunications, and transportation,continue to be overly protected from inter-national competition. They believe thatgreater openness to foreign competitionwould strengthen some of Canada’s impor-tant clusters of traded industries.

Both motivations and structures arecontributing to our under investmentpattern in Canada. Opportunities for taxreform need to be explored to heightenmotivations to invest. And, in addition to under performing clusters, other struc-tures may be impeding prosperity.Structural barriers to access to capital foryoung, growing firms may be a reason forunder investment in Canada. In addition,structural barriers may be hamperingefforts to commercialize new research anddevelopment findings. These obstacles need to be removed so all Canadians caninvest for prosperity.

Work done by Michael Porter's Harvard-based Institute for Strategy and Competitive-ness indicates that the main differentiatorbetween successful and unsuccessful clustersis the “context for firm rivalry and strategy”(Exhibit 18). The most vibrant clusters arethe ones that have greater competitive inten-sity. At the other extreme, the factor that hadthe least impact on a cluster’s vibrancy was“factor conditions.” Nearly all clusters are inplace because of factor conditions; butsuccess will not be guaranteed by stronginput factors. As Porter has said on manyoccasions, it is how companies compete notwhere or in what industry.47

As we think about the interplay betweencompetitive intensity and attitudes, itbecomes clearer that, while attitudes may besimilar in Canada and in the US, the resultsare radically different because they are heldin different competitive environments. Anexample from the sports world illustrates thepoint. A young person growing up in the USmay be a talented hockey player and havehealthy attitudes about winning and teamplay, along with personal aspirations to playin the National Hockey League. He and hisparents may have invested in the best avail-able equipment and his desire may motivatehim to practise and train intensely.

Nevertheless, an equally talented youngperson in Canada with the same healthy atti-tudes, the right level of investment in equip-ment, and the same motivation to train andpractise has a better chance of getting to theNHL. Why? From his earliest days of playinghe will be exposed to tougher competition,more advanced equipment, more opportuni-ties to gain ice time to play and practise,better-organized leagues, and a system that

47 See for example, “Clusters of Innovation: Regional Foundations of US Competitiveness,” available through the Institute for Strategy and Competitiveness Web site, www.isc.hbs.edu

Canadians need to encourage studentsto invest in their higher educationAlthough our K-12 educational achievementscompare favourably with those of our UScounterparts, more of our high school grad-uates should pursue post-secondary educa-tion and especially graduate degrees. Sincethose with higher levels of education earnmore over their lifetimes and our economybenefits more from their labours, we arelosing out on the potential of those who fallshort of their educational potential.

Currently, Canadians are less likely thantheir US counterparts to encourage youngpeople to pursue further education.Compared to the US, Canada is close in thenumber of bachelor’s degrees conferred per1,000 population. But at the master’s levelthe US leads dramatically. Our US counter-parts continue the investment farther alongthe higher education spectrum than doCanadians, especially at the level of “termi-nal masters” – the final degree for the vastmajority of its holders before they enter theeconomy to enhance productivity. The USalso outproduces Canada in conferringPhDs, though by a substantially lowermargin than at the master’s level. Raisingour educational aspirations is an importantway to increase productivity.

For individuals, we recommend that theydevelop a commitment to life-long learningto enhance their own skills and update theircapabilities. Nothing improves life-time earn-ings as much as education. We also encour-age graduates at every level to contributemore generously to their alma maters to helpfinance their ongoing development. Finally,we encourage current students to recognizethat supporting the freezing of regulatedtuitions, while attractive for them in theshortrun, helps guarantee the long-rununderfunding of higher education.

All stakeholders in Canada’s economic futureneed to examine their own strategies andactions to ensure that we are making appro-priate investments for future prosperity.Governments at all levels need to lead thecharge by re-orienting their own spendingand by developing policies that drive addi-tional investment in physical and humancapital. Businesses need to invest, especiallyin the machinery, equipment and softwarethat will increase productivity. Individualsand families have to increase the investmentin their own human capital and well-being.

Through a stronger sense of partnershipbetween all stakeholders, we can take thestrides necessary to close the prosperity gap. As important first steps, the Instituterecommends the following set of actions for Canadians.

Heighten aspirations across CanadaWe recommend that Canadians heightenaspirations. The first and probably mostimportant change required is to set a higher standard for our economic progress –we want to be a leader not laggard withinNorth America.

For this to become a reality, all Canadianshave to raise their sights. Individuals mustraise their aspirations for personal upgrad-ing of their skills and capabilities throughincreased formal education and life-longtraining. Canadian firms must raise theiraspirations from competing locally, provin-cially, or nationally to competing globallyagainst the best in the world. Finally, govern-ments at all levels in Canada must raise theiraspirations to achieve an invigorating envi-ronment that encourages citizens and firmsto upgrade and innovate and that comparesfavourably with the environment of the US.And we need to celebrate the winners whohave set and met high aspirations. Withoutraised expectations, it is doubtful thatCanada can enhance its relative prosperity.

We encourage firms to continue partnershipswith their employees to participate inongoing formal training and educationprograms and to include educational institu-tions – especially the most dramaticallyunder funded undergraduate and graduateprograms – in their charitable donations.

For governments, we recommend that along-term strategy be developed to raiseCanadians’ investments in post-secondaryeducation. We encourage provincial govern-ments to recognize that, by historicallymaintaining a government monopoly onuniversity education and strictly regulatingmost tuition levels, they have been primarilyresponsible for producing an investmentlevel in higher education that is half that ofour US competitors. A long-term strategyfor higher education in the provinces shouldexplore a sustainable approach to provincialfunding, consider the role of tuition deregu-lation, and continue to foster the develop-ment of a diversity of post-secondaryinstitutions. The strategy should ensure thatthe solutions take into account the role ofindividuals, firms, and other private organi-zations in improving our investments inhigher education.

Canada needs to invest in processesfor integrating immigrants more effectively into our economyCanada is becoming the home for manyhighly educated immigrants. We observed,however, that a large number are underem-ployed or even unemployed. The result isthat we are forgoing their potential tocontribute more to our economic well being.Some programs are successfully integratingimmigrants into Canadian professions andemployment.

Partnering for Investment


Canadians need to ensure marketstructures support break out investmentOur work during the year identified governance and market structures thatimpeded prosperity growth. Canadians needto determine the negative impact of marketstructures on productivity and prosperityand how that can be reversed. One hypo-thesis for our under investment may be thatour market structures are not stimulatingthe competitive intensity that forces theinnovation and upgrading necessary toenable Canadian companies to thrive in the world arena.

For Canada to continue to prosper, allCanadians must participate in a partnershipto invest more than ever before to raise ourproductivity and competitiveness in theglobal arena. That way, we can close theprosperity gap and enjoy the economic wellbeing that comes from our place as one ofthe leading economies in the world.

We encourage individuals to continuesupporting the not-for-profit sector in devel-oping the breadth and depth of programsand processes for settling recent arrivals intoour economy and communities. We encour-age employers to continue exploring innova-tive approaches to reaching out to the talentinherent in our recent immigrants and towork closely with accrediting organizationsto ensure policies and practices are up todate. We encourage governments to continuetheir co-operation in developing settlementprograms and policies.

Canadian stakeholders need to takeinitiatives to address the chronic underinvestment by businesses in machineryand equipmentCapital investment is a major contributor toGDP growth. But both private and publicsector investment in machinery and equip-ment and infrastructure in Canada now lagcapital spending in the US. We estimate thatour under investment costs Canadians$1,000 in lost GDP per capita every year. Theclear answer is for business and govern-ments to raise their investment especially inmachinery and equipment to add to theproductive capacity of Canada’s economy.

Provincial and federal governmentsneed to rethink our tax system toencourage investmentTo increase our competitiveness, Canadamust continue to reduce taxes, especiallytaxes on capital. In 2002, we identified thedisadvantage in marginal effective taxburdens in Ontario versus a group of USstates and showed how this affectedOntarians’ motivations to invest. Our latestresearch indicates that the disadvantagewidened in 2003. The Institute is not recommending specific tax measures – it issimply urging our governments to recognizethat taxes represent a disadvantage forCanada’s competitiveness that can be over-come by developing innovative solutions in our tax regimes.

Please visit our web site:www.competeprosper.ca

or contact us at:

The Institute for

Competitiveness & Prosperity

180 Bloor Street West, Suite 1100

Toronto, Ontario

Canada M5S 2V6

Telephone 416 920 1921

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Executive Director

James Milway

416 920 1921 x222

[email protected]

Researchers

Jordan Brennan

416 920 1921 x228

[email protected]

Claurelle Poole

416 920 1921 x224

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Jennifer Stewart

416 920 1921 x223

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Institute for Competitiveness & Prosperity:

Working Paper No. 1 – A View of Ontario:Ontario’s Clusters of Innovation – April 2002

Working Paper No. 2 – Measuring Ontario’sProsperity: Developing an Economic IndicatorSystem – August 2002

Working Paper No. 3 – Missing opportunities:Ontario’s urban prosperity gap – June 2003

Working Paper No. 4 – Striking similarities:Attitudes and Ontario’s prosperity gap –September 2003

Task Force on Competitiveness,Productivity and Economic Progress:

First Annual Report – Closing the prosperity gap – November 2002

Second Annual Report – Investing for prosperity – November 2003

Should you wish to obtain a copy of one ofthe previous publications, please visitwww.competeprosper.ca for an electronicversion or contact the Institute forCompetitiveness & Prosperity directly for a hard copy.

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Partnering for investment in Canada’s prosperity · Canada’s prosperity requires closing the productivity gap 9 Improving productivity is the key challenge to eliminate our prosperity