Canada will lose ground as a global competitor unless it eliminates many interprovincial barriers and spurs productivity, says the Conference Board of Canada.

The crippling provincialism that prevents the creation of a national securities regulator is not an anomaly unique to the financial services sector. A sweeping new report says such regional squabbling plagues Canada’s economy and undermines our global competitiveness.

In mid-January, the Ottawa-based Conference Board began publishing a series of four reports calling for a slew of reforms. Ultimately, the board will make a total of 76 recommendations dealing with seven broad strategies it says are necessary to enable Canada to compete and prosper in the increasingly global economy. Sorting out securities regulation is just a small part of the solution.

At stake, the board claims, is Canada’s economic future.

“We are becoming less competitive,” Janice Gross Stein, director of the Munk Centre for International Studies at the University of Toronto, wrote in the preface to the report. “Canada lags behind most developed economies in productivity growth. Our resources sectors require significant new strategic investment if they are to meet global competition, and our biggest cities are starved for investment in comparison with global cities elsewhere. In vital sectors of our economy, we are not keeping up with our competitors.”

The crux of the problem, the report argues, is the “balkanization of our economic space.” By preserving provincial barriers in areas such as labour mobility and supply-chain efficiency, Canada undermines its own prosperity. “In an age of global mobility, it simply makes no sense to add degrees of difficulty to the movement of people, goods and services from one province to another,” wrote Stein.

Although the impact of interprovincial bureaucratic barriers may not be evident to most people, anyone who has dealt with the securities regulatory system knows the effect first-hand. Business is delayed and disrupted for no good reason, there are pointlessly duplicative costs and, as a result, foreign players are discouraged from entering our markets.

The report says the same kind of needless costs, inefficiencies and deadweight losses are felt throughout the economy. What’s needed, it says, is a national effort to overcome the historical impediments, along with strategies to allow for sustainable growth in the years ahead.

At its core, the report calls for the creation of a “single Canadian market” by reducing internal regulatory and trade barriers, including those imposed by provincial securities regulation.

“In the same way that the European Union has been developing one market for more than two dozen countries, Canada needs to create a single Canadian market,” says Glen Hodgson, the Conference Board’s senior vice president and chief economist. “We see glimmers of hope in actions such as the British Columbia/Alberta trade and investment agreement and other regulatory reforms, but we need to move further and faster to tear down barriers.”

Among other things, the board also recommends: focusing on pursuing sustainable economic growth; adopting a national productivity strategy; reforming tax policy, with an eye toward improving productivity (cutting capital taxes, for example); enhancing labour market mobility and flexibility; adopting a more determined approach to international trade and investment; and placing a renewed foreign policy focus on our most important trading partners — both the traditional, such as the U.S., and the emerging powers, such as China.

The second volume of the report, released on Jan. 22, focuses on the resources sector specifically. It calls for a variety of reforms, including: increasing trade in the forestry, agriculture and energy sectors; boosting research and development investment into clean energy sources; investing in infrastructure; and providing training and relocation assistance to help meet labour requirements in the sectors.

A third volume, which will tackle how to make cities successful, is due Feb. 6. The fourth volume, due out at the same time, is an executive summary of the whole report. It will argue that Canada’s prosperity is very dependent on its major cities, and that they must receive both more money and power to capitalize effectively on their strengths and boost the economy as a whole.

Many of the ideas aren’t particularly revolutionary. Various commentators have been making similar points about the need for such reforms in the Canadian economy for a long time.

Bank of Canada Governor David Dodge has repeatedly stressed the importance of structural flexibility in facilitating adjustments to global business trends. Asked about the Conference Board report, Dodge says the central bank hasn’t specifically studied the issue of internal trade barriers.

@page_break@“Anything we can do to improve the structure of the economy, to enhance the flexibility of the economy, obviously means that we can grow faster without creating inflationary pressures,” he says. “So, anything we can do in that regard is good.”

Last year, TD Bank Financial Group economists published a report that suggested there is consensus among economists on many of the policy prescriptions for improving productivity. These include freeing up both international and interprovincial trade, cutting capital taxes, dropping foreign-ownership restrictions and merger roadblocks, facilitating labour mobility and improving immigration.

The International Monetary Fund recently called for many of the same policy moves.

“In addition to cutting high marginal effective tax rates on capital and improving financial market intermediation,” the IMF said in preliminary consultations for its 2007 report on Canada, “priorities could include phasing out restrictions to foreign direct investment, reducing the regulatory burden on firms, eliminating interprovincial barriers to trade in goods and labour mobility, and adapting the immigration system more fully to the needs of the economy.”

The Conference Board report ventures further afield from the established consensus by calling for a more strategic approach to certain policies, such as different funding levels for certain institutions and cities to cultivate their comparative advantages. It is also progressive in recognizing the importance of sustainability, and the need to account for the environmental and social costs of economic growth.

What has yet to be seen is whether its message will be heeded any more closely than previous calls for structural and policy reform. Certainly, labour productivity has long been recognized as a persistent problem for Canada, even at a time when the country has been the strongest of the G-7 economies.

TD’s report says most economists agree that feeble productivity growth is the biggest challenge currently facing the Canadian economy: “They believe weak productivity is compromising the Canadian standard of living and threatens many aspects of the quality of life that Canadians cherish.”

At the time, TD reported that labour productivity grew just 1% a year from 2000 through 2005, down from 2.7% in the previous five-year period. Things haven’t perked up much since then.

In fact, the most recent data have managed to disappoint already low expectations. In the third quarter, TD reports, year-over-year productivity growth had slipped to just 0.4%. Early fourth-quarter data suggest that productivity actually declined in the period.

The latest issue of the Bank of Canada’s Monetary Policy Report, released on Jan. 18, confirms that the most recent productivity data have been weak, although it also indicates the central bank was unsure about the quality of that data.

“Recent data on productivity have been disappointing,” Dodge says. “It is unclear how much of this weak performance is caused by cyclical factors that will be reversed in due course, and how much represents a permanent downward shift in the trend rate of productivity growth.”

He adds that productivity data tend to be revised, which makes the current data even less reliable.

Nevertheless, there is consensus that weak productivity growth is a problem. The gauge is important to the central bank because productivity helps determine the size of potential output, which is, in turn, critical in the formation of monetary policy. Beyond that, growth is also critical to the economy’s longer-run performance, as rising productivity drives higher wages and living standards.

Many of the issues involved fall to the federal government, which can be another hurdle. A long tenure of majority governments with no effective Opposition and little conviction has been replaced by the opposite extreme — successive minority governments. The current situation makes it hard to undertake bold initiatives that carry potentially dire political consequences.

The inherent inefficiencies in the interprovincial system aren’t immediately obvious to most Canadians, and neither are the potential gains that would come from dismantling reams of barriers. Without a quick return, it’s unlikely that many politicians would be willing to take the risk to pursue many of the proposed solutions. IE