Canada has weathered the global economic crisis comparatively well but will have to become more productive to sustain its high standard of living, according to OECD’s latest Economic Survey of Canada.
A timely fiscal stimulus, low interest rates, a solid banking sector and revenues from natural resources helped Canada return to a stable growth path after the global economic crisis of 2008-09. With rising real estate prices and high household indebtedness now posing new risks, OECD projects Canada’s economy will grow by around 2.25 per cent in 2012 and by around 2.5 per cent in 2013.
Sluggish productivity growth is the main long-term challenge facing Canada’s economy, said the report. Per capita income has increased in recent years, as more people entered the labour force and oil and other commodity prices soared, pushing up the value of the Canadian dollar. However, multi-factor productivity or the amount of labour, capital and natural resources needed to produce a unit of GDP has remained largely the same over the past few decades.
Canada’s overall productivity has actually fallen since 2002, while it has grown by about 30 per cent over the past 20 years in the United States, said OECD. At the same time, income has shifted towards the resource-rich western provinces, while the regional economies of Ontario and Quebec are still adapting to increased external competition resulting from the high exchange rate.
“Canada is blessed with abundant natural resources. But it needs to do more to develop other sectors of the economy if it is to maintain a high level of employment and an equitable distribution of the fruits of growth,” said Peter Jarrett, head of the Canada division at the OECD economics department and co-author of the study.
The OECD identified two key priorities for meeting this long-term challenge.
First, Canada needs to boost innovation. It has world-class research institutions and provides strong public support to business investment in research and development (R&D), said the report. However, the business sector devotes only about one per cent of GDP to R&D, compared with two per cent in the U.S. and more than 2.5 per cent in Japan, Korea and some of the Nordic countries.
Canada remains a low performer on business investment in R&D, even when the large share of natural resource production is taken into account.
The OECD recommends more focused support for business investment in R&D. The government should maintain the current system of tax credits; however, particularly generous credits to small Canadian-owned private firms should be reigned in and partly replaced by more targeted direct grants, it said. Opening up network industries and liberal professions to more competition would also enhance incentives for innovation, thereby generating higher productivity.
Second, Canada should invest further to improve both quality and access to tertiary education, to maintain the supply of highly skilled workers as the population ages. Financial assistance to students should become more targeted and granted on a means-tested basis, said OECD. This would help reduce the barriers for financially disadvantaged students and promote more socially inclusive growth.
Tertiary education should also become more flexible and facilitate lifelong learning. Canada should seek to attract more foreign students into its tertiary system and make it easier for them to work and stay in Canada after graduation. Finally, universities should be differentiated between institutions that engage in research and those that focus primarily on teaching, said the report.
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