Canada's Productivity Slide Leaves Much to Be Desired

Canada's trade dispute with the US and its efforts to boost investment have highlighted a fundamental issue: the country's long-term productivity malaise. Despite being an open economy with low effective tariff rates and access to the largest market in the world, Canada's productivity performance has waned in recent decades. According to data from the Fraser Institute, Canada's real per-person GDP growth rate declined steadily since the 1960s, with the 2020s being the most dismal period since the Great Depression.

The decline is particularly noteworthy when compared to the US, which experienced a slowdown in productivity growth after the 1970s oil price shock. However, since 2000, the Americans have reversed this trend and seen their productivity grow again. Despite increased integration with the US market through free trade agreements like NAFTA, Canada's per-person income growth has generally been weaker.

Experts point to several factors contributing to Canada's weak productivity performance, including lower investment in productivity-enhancing capital, smaller market size due to interprovincial trade barriers, and high personal and business taxes. The country's reliance on its natural resource sector is also seen as a hindrance to innovation and growth.

Figure 2 from the Fraser Institute shows that Canada's real per-person GDP relative to the US rose for the first century after Confederation but has since consistently grown more slowly than the US. This paradoxical relationship between integration and divergence has been explored in economic literature, with some arguing that increased trade can lead to a concentration of research and development in the country with the initial advantage.