At the start of a new decade, Canadians have much to be proud of, solid grounds to be ambitious for our future, and no reasons whatsoever to be complacent. Canada weathered the worst global financial crisis since the 1930s better than most advanced countries, and demonstratively better than the United States. We also have led the G7 in the unsteady and volatile global recovery. This resiliency is anything but luck " it is due to solid economic management over more than a decade, low debt, a diverse economy with efficient safety nets, and a sound financial system.

But we are in the midst of a changing world order. Structural trends and events are reshaping economies, societies and politics and upending the status quo. The globe is restructuring, and the economic centre of gravity is shifting to Asia. The demographics of aging are changing societies and putting an incredible premium on skilled workers.

This is a world where productivity and innovation are at the root of the new global competiveness. Here lies our paradox and challenge " we are a sophisticated knowledge-based economy, with a highly educated workforce, a multicultural population and a strong university research sector, but we are chronic underperformers in innovation and productivity.

Canada’s productivity deficit is devilishly entrenched. Canadians are convinced that increasing productivity would somehow make them work more and receive less.

And yet it is several decades of poor productivity performance that has forced us to work harder and harder, to use up our scarce natural resources faster and faster, to provide fewer public goods and services, and to be less wealthy as a country and society. Our productivity deficit becomes more costly as the Canadian population ages, our competitors focus on increasing productivity growth and innovation, and the artificial support of a low dollar becomes a memory.

Canadians need to confront some uncomfortable facts about productivity. To start, consider how productivity growth in our business sector has evolved. Labour productivity in the Canadian business sector grew at an anaemic 0.8 percent average annual rate over the last decade (2000-08), about half the pace of the previous two decades and one-fifth the pace over the period 1950-75 (see figure 1).

Our productivity performance is even weaker when compared with those of other countries. Using the common international measure of productivity, output per hour worked per worker, Canada was an astounding 17th among OECD nations in 2007, worse than almost all the Euro economies, the Scandinavian countries and the United States. But thankfully, Canadians work more hours than the OECD average, so our total output per worker ranks 8th among those of OECD countries, better than most European nations but far behind that of the United States.

Canada-US productivity comparisons are even more worrisome. In 2007, Canada’s business-sector productivity (measured per worker) was only 75 percent of that of the United States, despite the highly integrated nature of our North American economies. And the trend is not good: on this same measure Canadian business productivity was over 90 percent of comparable US productivity levels in the early 1980s (see figure 2). At the same time, there is more dispersion in productivity performance across sectors in Canada than in the US, suggesting US business adapts new technologies and processes and is more competitive. Further, in the service sector, which tends to dominate both economies, for more than a decade the US has sustained broadbased and consistently higher productivity growth than has Canada.

In short, Canada has a productivity problem, and it is costly. Canada’s 25 percent business-sector productivity gap with the US ”œcosts” it $300 billion annually in lost income, and that is a lot of foregone jobs, profits and tax revenues.

The impact of this productivity deficit is being compounded by demographic trends: the Canadian population is aging, our labour force participation rates will decline and hours worked will fall. Canada will shift from the prevailing postwar situation of an excess supply of labour to a new reality of excess demand for labour, particularly skilled workers, as a constraint on growth.

And a Canadian dollar near parity really bites when the Canadian productivity rate is just 75 percent of that of the US. Looking ahead, there is no reason to believe that a weaker dollar will again compensate for weak productivity and innovation performance.

What accounts for the state of Canada’s poor productivity and innovation performance? After all, Canada is among the largest and richest countries in the world and has a well-educated population, a diverse industrial base and a high degree of integration with the US economy through trade agreements and corporate linkages.

A convincing explanation advanced in the 1990s was the sorry state of Canada’s macroeconomic fundamentals. Our national debt was the second worst in the G7, our deficits were never-ending, our national pension plan was in actuarial trouble, our corporate bond and stock prices had high-risk premiums, and our statutory corporate tax rate was significantly higher than that of our neighbour and largest trading partner. Not conditions to encourage investments in productivity, Canadian business argued, and it was correct.

But not today. Canada’s debt is now the lowest in the G7, our national pension plan is actuarially sound, macroeconomic risk premiums relative to the United States have disappeared from Canadian stocks and bonds, and Canada’s statutory corporate tax rates are 12 percentage points below those of the United States. Despite these structural improvements, Canada’s business-sector productivity growth performance was actually worse in the decade just ended than in the 1990s. Clearly, while these macroeconomic impediments mattered, we need to look more broadly, systemically and behaviourally for a solution.

Extensive research points to a number of factors that likely contribute to our poor productivity performance. These include the following:

  • Innovation and productivity show positive long-term correlation. And, Canada ranks 15th among OECD countries in business-sector spending on research and development (R&D). Canadian business spending on R&D is only 1 percent of GDP, well below the OECD average of 1.6 percent of GDP, and half that of the United States, and onethird that of countries like Sweden, Korea, and Holland (see figure 3).

  • Information and communications technologies (ICT) are strongly correlated with productivity growth. And Canadian business invests significantly less in ICT than do many OECD countries per employee, and only 50 percent of the US. There are particularly large ICT-per-worker gaps in the service sector, which accounts for 70 percent of Canada’s GDP and almost 80 percent of the United States’ GDP.

  • Leading-edge machinery and equipment (M&E) typically increases worker productivity, particularly when combined with training. And Canadian business invests significantly less M&E per worker than do the United States and many other OECD countries.

  • Smaller firms on average have lower productivity levels than larger ones, and Canada has a smaller average firm size than does the United States, which probably affects its productivity levels. Yet, over the last decade, the relative firm-size difference between Canada and the United States has narrowed, and this should have increased Canada’s productivity growth.

  • Greater competition is associated with more innovation and productivity improvements, as is a global market orientation and experience. Both the OECD and the Competition Review Panel argued that strong competition may be lacking in some sectors in Canada, negatively affecting innovation and productivity.

  • A lower dollar encourages business to use fewer imported inputs, and this includes imported high-technology M&E and the licensing of new technologies developed elsewhere. As a result of a low Canadian dollar, Canadian firms used relatively less capital and new technologies than did their competitors in the US, Germany, Japan and elsewhere, reducing their short-term costs but impairing their medium-term productivity.

In short, Canada has a business-sector productivity problem. As Bank of Canada Governor Mark Carney recently observed, ”œgovernments have put in place conditions for a productivity revival. Business, thus far, has disappointed.” There is less of a receptor capacity in Canadian business for investments in innovation, less of a focus on productivity and innovation as part of business strategies, and less business spending on ICT. All this will need to change if we are to reduce our productivity and innovation deficits.

There is no single cause of Canada’s productivity and innovation deficits, and there is no one-size-fitsall remedy. But there is urgency. A Canadian dollar near parity with the US dollar would not be particularly stressful for the Canadian economy if Canada’s business-sector productivity was also near parity with the United States. But it is not. The demographic crunch of an aging population and a declining working-age population is a reality. The shifting of wealth and demand away from our traditional markets to Asia is happening today. The increasing focus on higher technology, not low-wage competition, from China and elsewhere is already underway. What all these developments have added up to is the conclusion that there needs to be a much greater focus on tackling innovation and productivity today so that we are more competitive tomorrow.

We know what will not work " one-off approaches, or tinkering with small fiddles to a systemic problem. We also know what will work " a culture of competing to win. We need the steely determination and the risk-taking to consistently win in tough global markets. We need to be willing, day in and day out, to challenge the status quo, to reject being average as being good enough. We need a culture of research and innovation in our business community and less risk aversion to taking on new markets. Here are five things that would help Canada compete to win:

Information-driven competition. We need to introduce a more competitive frame into the Canadian business environment, and a more international mindset in Canadian management. Without policy changes, can we introduce more ”œinformation-driven competition” into Canadian business decision-making? Are there ways to hold up a ”œglobal best practices mirror” to Canadian business? Change will only happen if it is the ongoing focus of business management, their corporate boards, shareholders and equity markets.

To create more ”œinformation-driven” competition in Canada, we should consider establishing a national productivity and innovation council. The remit of the council would be to business, to governments and to Canadians. Its focus would be clear: to benchmark Canadian business to best practice in innovation and productivity in, say, our top five competitor countries, and on a sector-by-sector basis. These sectoral benchmarks would be comprehensive scorecards of global best productivity and innovation practice. They would be public " something managements, boards and financial markets would use in judging the long-term performance of a company. The council’s effectiveness would be determined by the rigour of its benchmarking analysis and the credibility of its leadership.

Financing. We need to address weaknesses in the ability to finance innovation and productivity improvements, both through venture capital and traditional banking.

Without venture capital, it is difficult to see how innovation start-ups will actually grow up. But the Canadian venture-capital sector is not working. While a number of contributing factors have been advanced over the years, it is still not clear why the Canadian venture-capital sector has fallen so far behind countries such as the United States, Israel and Singapore. We need a blueprint for a venture-capital sector that is specifically structured to meet Canada’s research strengths and innovation needs, and an understanding of how such a redesigned venture-capital industry would help reduce Canada’s innovation deficit.

Without banking-sector financing, it is difficult to see how the large investments in innovation and productivity needed from the business sector will be possible and sustainable. The traditional banking sector must do more in productivity and innovation lending. Since innovation and productivity investments improve the long-term growth and profitability of firms, this is an area of lending banks should develop more expertise in, both for advising clients and for facilitating credit. Everybody will win if Canadian business is more innovative and productive.

A focus on talent. A highly skilled workforce is essential to driving productivity in a knowledge-intensive, one-off approaches, or tinkering with small fiddles to a systemic problem. We also know what will work " a culture of competing to win. We need the steely determination and the risk-taking to consistently win in tough global markets. We need to be willing, day in and day out, to challenge the status quo, to reject being average as being good enough. We need a culture of research and innovation in our business community and less risk aversion to taking on new markets. Here are five things that would help Canada compete to win:

Information-driven competition. We need to introduce a more competitive frame into the Canadian business environment, and a more international mindset in Canadian management. Without policy changes, can we introduce more ”œinformation-driven competition” into Canadian business decision-making? Are there ways to hold up a ”œglobal best practices mirror” to Canadian business? Change will only happen if it is the ongoing focus of business management, their corporate boards, shareholders and equity markets.

To create more ”œinformation-driven” competition in Canada, we should consider establishing a national proglobal economy. The importance of the labour force is underscored even more by the demographic trends. With fewer people working, it is simple arithmetic that each worker has to produce more (that is, be more productive) just for there to be the same supply of goods and services. This points clearly to education.

Canada needs a focus on talent. In a knowledge-based economy, high school completion and rigorous minimum literacy standards should be givens, not aspirations. We have fewer people with university degrees than many of our competitors, and fewer still in the scientific and technology disciplines. We are not training our university students in language skills and international management skills, both of which are essential in the global market. And while immigration is the main avenue to offset our demographic trends, its effectiveness depends on the extent to which we attract well-educated immigrants of working age with the needed skills.

The global gravity shift. Global GDP is shifting to Asia. But Canada’s trade linkages are overinvested in traditional markets and underinvested in new and promising but risky markets. Canada needs a clear and focused market-enlargement strategy to respond to the long-term rise of Asia and Brazil.

Such a strategy must include new economic partnerships with the Asian triangle of China, Japan and India. It should also expand the Americas’ strategy to Brazil, as well as complete a newgeneration economic arrangement with Europe. These arrangements should be orientated less to trade in goods (leave these to the WTO), and more to the treatment of services, investment, R&D, intellectual property and dispute-settlement arrangements.

Any enhanced trade strategy must deal with the paradox that, while Canada is hugely reliant on trade, a surprising number of Canadian firms do not export, even to the United States. We need to encourage more firms, particularly small and medium-sized firms, to engage in international trade. For small and medium-sized companies, it is difficult to go global without a global Canadian banking presence.

Leadership. Our challenge in tackling our productivity and innovation deficits is that too many leaders, in government and business and organized labour, react instinctively and negatively to the Pword, ”œproductivity.” Too many approach the P-word with resignation that what’s to come is another lecture; with trepidation that what’s to be proposed will somehow make us work longer and for less; with misplaced conviction that it is a real problem and someone else better fix it; or with certainty that even talking about it, let alone doing something about it, is bad politics, regardless of its public-policy merit.

But while these reactions are common, they are also part of the problem. We are a market-based economy, and the vast majority of productivity and innovation gains must come from business. Business attitudes matter, and business needs to focus more on continual innovation and productivity growth. Our marketplace needs more competition to spur faster adoption of new technologies and processes, and to reward innovators and early adapters. There must be a greater sense of common purpose between our researchers, primarily those in universities, and business.

Governments should place more emphasis on speed, agility and competitive frameworks to support innovation and productivity, rather than process and entitlement. In short, we need strategic leadership to effectively tackle our productivity and innovation deficits.

The global context facing Canada over this decade will be characterized by complexity, uncertainty and change. In this environment, innovative and productive economies will have a much better chance of sustained growth, rising living standards and good jobs.

There is no reason for us to be productivity and innovation laggards: there are no insurmountable obstacles before us. The challenges and solutions lie in our hands. Now is the time to embrace the new competitiveness, close our productivity and innovation deficits with the United States, and compete to win.