Prospects For Ontario 2011 Task Force On Competitiveness, Productivity And Economic Progress
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Prospects For Ontario 2011 Task Force On Competitiveness, Productivity And Economic Progress

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Simple stated there is more work to be done to achieve the 2020 Productivity Challenge. Since 2001 the Institute for Competitiveness, Productivity and Economic Progress mandate has been to measure and ...

Simple stated there is more work to be done to achieve the 2020 Productivity Challenge. Since 2001 the Institute for Competitiveness, Productivity and Economic Progress mandate has been to measure and monitor Ontario’s competitiveness, productivity, and economic progress compared to other provinces and US states, and to report to the public on a regular basis. A independent not-for-profit organization is supported through the Ministry of Economic Development and Innovation.

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Prospects For Ontario 2011 Task Force On Competitiveness, Productivity And Economic Progress Prospects For Ontario 2011 Task Force On Competitiveness, Productivity And Economic Progress Document Transcript

  • ProsPectsar 10 for oNtArIo’s ProsPerIty A look back and a look ahead Task Force on compeTiTiveness, producTiviTy and economic progress tenth Annual report November 2011
  • Chairman task force on competitiveness,roger L. martin Productivity and economic ProgressJoseph l. rotman school ofManagement The Task Force on Competitiveness, Productivity and Economic Progress was announced in the April 2001 Speech from the Throne. Its mandate is to measure and monitor Ontario’s competitiveness, productivity, and economicmembers progress compared to other provinces and US states. In the 2004 Budget,John armstrong the Government asked the Task Force to incorporate innovation and commer-the capital Markets company (capco) cialization issues in its mandate. The Task Force reports directly to the public.James L. Balsillie It is the aspiration of the Task Force to have a significant influence in increas-research in Motion ing Ontario’s competitiveness, productivity, and capacity for innovation. This, we believe, will help ensure continued success in the creation of good jobs,Timothy d. dattels increased prosperity, and a high quality of life for all Ontarians.tPG capital The Institute for Competitiveness & Prosperity is an independent not-for-Lisa de Wilde profit organization established in 2001 to serve as the research arm of thetVontario Task Force. Working Papers published by the Institute are primarily intended to inform the work of the Task Force. In addition, they are designed to deependavid Folk public understanding of macro and microeconomic factors behind Ontario’sJefferson Partners economic progress and stimulate debate on a range of issues related to com- petitiveness and prosperity.suzanne FortierNatural sciences and engineering Comments on this Tenth Annual Report are encouraged and should beresearch council of canada directed to the Institute for Competitiveness & Prosperity. The Task Force and the Institute are funded by the Government of Ontario through the Ministrygordon J. Homer of Economic Development and Innovation.Gordon J. homer advisory servicesp. Thomas Jenkins Copyright © November 2011opentext The Institute for Competitiveness & Prosperity ISBN: 978-1-927065-01-3david keddieNational compressed airL. Jacques ménard, o.c.bMo Nesbitt burnsmark mullinsVeras inc.Timothy H. pennerdaniel TreflerUniversity of toronto
  • ProsPects forontario’s ProsPerityA look back and a look aheadTenth Annual ReportNovember 2011 View slide
  • exhibitsmain ExhibitsExhibit 1 Ontario ranks among the leading international peers 8Exhibit 2 Ontario trails its North American peers 8Exhibit 3 Ontario’s prosperity gap widened slightly in 2010 9Exhibit 4 Ontario’s GDP performance compared to other Canadian provinces has been lackluster 10Exhibit 5 The Task Force has set out a 2020 Prosperity Agenda to narrow our prosperity gap 13Exhibit 6 The Task Force measures four components of prosperity 16Exhibit 7 Higher productivity is needed to close Ontario’s prosperity gap 17Exhibit 8 Lagging productivity accounts for most of our prosperity gap 17Exhibit 9 Ontario has a demographic advantage over our peers 29Exhibit 10 Ontario has a higher participation rate than peers 30Exhibit 11 Ontario’s unemployment rate fell and then rose again in the recession 31Exhibit 12 Ontario leads its peers in utilization of its working age population 32Exhibit 13 Ontario workers are on the job less than North American peers, but more than their international peers 33Exhibit 14 Ontario has a persistent and significant productivity gap 34Exhibit 15 Ontario has made good progress in awarding bachelor’s degrees, but still trails at the master’s level 37Exhibit 16 Ontario continues to trail in awarding business degrees 37Exhibit 17 Fewer Ontarians lack a high school diploma 38Exhibit 18 Unemployment rates are higher for those with less education 39Exhibit 19 Ontario’s managerial education gap has closed slightly 41Exhibit 20 The incidence of Ontarians living in poverty has not changed much 42Exhibit 21 In Ontario, public investment in education trails health care spending significantly 45Exhibit 22 Our businesses lag their US counterparts in productivity enhancing investments 46Exhibit 23 Ontario’s businesses trail in R&D investments 48Exhibit 24 Ontario businesses lag in patent creation 49Exhibit 25 Ontario is now a low tax jurisdiction for business investments 50Exhibit 26 Support and pressure drive innovation 52Exhibit 27 Ontario has a higher share of its workers in clustered industries 53Exhibit 28 Ontario’s lower percentage of population in metropolitan areas reduces its productivity 54Exhibit 29 Venture capital investment in Ontario trails US leaders’ quantity and quality 55Exhibit 30 Canada has negotiated or is in the process of negotiating several trade deals 56Exhibit 31 Ontario has gained Global Leaders since 1985, but has lost ten since 2003 57sidEbar ExhibitsExhibit A Larger food processing facilities are more productive 21Exhibit b Older workers are most severely affected by layoffs 402 View slide
  • contentsForEword & acknowlEdgEmEnts 4prospEcts For ontario’s prospErity 6our prospErity gap is a productivity gap 14 Four FActors mEAsurE ontArio’s prospErity gAp 16 Ontario has good work effort performance 16 Higher productivity is needed to close Ontario’s prosperity gap 19 productivity dEFicit is worsEning 22a tEn-yEar rEtrospEctivE and outlook For thE FuturE 24 work EFFort And productivity 28 Ontario’s prosperity growth needs to come from productivity growth humAn cApitAl 36 Our innovation performance depends heavily on our people and their capabilities invEstmEnt 44 Investments are the lifeblood of innovation and prosperity; Ontario businesses and governments need to invest more support And prEssurE 52 Public policy needs to drive both support and pressure to enhance our innovation performanceactions For innovation and prospErity 58prEvious publications 64  3
  • foreword & acknowledgements on bEhAlF oF ontArio’s tAsk ForcE on compEtitivEnEss, productivity And Economic progrEss, I am pleased to present our Tenth Annual Report to the Ontario public, Prospects for Ontario’s prosperity: A look back and a look ahead. Because of this special anniversary and the beginning of a new government in Ontario, we look back over the decade since 2001 and ahead to 2020 in this year’s Report. Our challenge has been, and continues to be, to achieve our full economic potential through higher productivity and more robust innovation performance. A recurring theme over the past ten years has been a recognition that Ontario is one of the most competitive and prosperous regions in the world. We have much to be thankful for – a rich endowment of natural resources, a tradition of building great physical assets and infrastructure to support prosperity, and a talented and diverse workforce that can get the job done. But despite these great strengths and solid economic results, we could do so much better. We have a wide prosperity gap with other large North American jurisdictions. The source of this gap is our inability to be as innovative as we could be in our economic life. While we lead most other regions around the world in competitiveness and prosperity, we do so largely by working more, not by being more innovative and productive – or working smarter. In taking stock of the past decade, we have some significant accomplish- ments to celebrate. Frankly, these accomplishments are more in the public policy arena than in the business sector. The provincial government has helped turn around our flagging investment in post secondary education. Along with the federal government, it has moved our tax system for business investment from being one of the world’s worst to one that is better than most. The province has worked closely with the federal government to expand international trade and has avoided the worrisome trend toward protectionism that we have seen elsewhere, particularly in the United States. Going forward, the provincial government should continue its international trade initiatives, keep investing in post secondary education, and explore new approaches to its Innovation Agenda. We urge the federal and provincial governments to build on our tax policy accomplishments by exploring funda- mental tax reform that is surely coming in other parts of the world.4 
  • While we lead most other regionsaround the world in competitivenessand prosperity, we do so largelyby working more, not by beingmore innovative and productive –or working smarter. The positive developments in public policy will not turn our innovationperformance around overnight. Education investments take up to a genera-tion to deliver a return, negotiations for trade deals are slow processes, andtax policy changes are just barely implemented. But they are a solid platformto support more innovation by our businesses. Our business leaders and people understand the need for innovation, butthey still need to turn these positive attitudes into action. They cannot becomplacent; instead, they must relentlessly pursue improved products,services, and processes. Our businesses have to step up investments ininnovation – from R&D and patenting to adapting existing technology to theirbusiness; from investments in physical capital to investments in human assets. As in past Reports over the decade, we offer a set of recommendations for anoverall Prosperity Agenda for 2020. And, as in the past, none is a quick fix, butthey put Ontario on the right track to build a more competitive and prosperouseconomy. Ontario has many of the building blocks to achieve its full prosperity,productivity, and innovation potential. Ontarians need to put them togetherfor the benefit of ourselves and our future generations. We gratefully acknowledge the research support from the Institute forCompetitiveness & Prosperity and the funding support from the Ministryof Economic Development and Innovation. We look forward to sharing anddiscussing our work and findings with all Ontarians. We welcome yourcomments and suggestions.Roger L. Martin, ChairmanTask Force on Competitiveness, Productivity and Economic ProgressDean, Joseph L. Rotman School of Management, University of Toronto 5
  • ProsPects forontario’sProsPerity01 116  CHAPTER
  • in this tEnth AnnuAl rEport to thE pEoplE oF ontArio, the Task Force onCompetitiveness, Productivity and Economic Progress looks back on the lastdecade of economic progress in the province and looks ahead with recommen-dations for stakeholders in our future prosperity. This historical and futureperspective is the essence of this year’s Annual Report, and is especially timelyas a new government begins its mandate. But even on this occasion for a long-term perspective, it is hard to avoid areview of the recent tumultuous past. Ontario, the rest of Canada, and count-ries around the globe have been on an economic roller coaster. And it’s notover yet. Over much of the decade since our establishment in 2001, Ontarioexperienced moderate growth in Gross Domestic Product (GDP). But it wastoo moderate for our economy to achieve its full economic potential. Andsince the beginning of the downturn in 2007, GDP growth has been anemic.The net effect is that between 2001 and 2010, Ontario’s GDP per capita hasbarely budged. Our stock market has been whipsawed. Between 2002 and 2008, the TSXindex more than doubled. It has swung dramatically in the past three years. The Canadian dollar has strengthened since 2002, when it was at 62 cents,reaching $1.08 in November 2007. Recently, it has fallen back from that highand stood near parity in October 2011. The dollar’s rise has certainly boosted pride among Ontarians, but it hadsevere consequences for our export industries, particularly manufacturing.Between 2002 and 2009, Ontario’s manufacturers shed 300,000 jobs. Whilethe hemorrhaging has stopped, there is no evidence that these jobs will becoming back soon. Despite the recent loses in manufacturing jobs, for most of the past decade,we have experienced low and declining unemployment rates. At the outset ofour work, Ontario’s unemployment rate stood at 7.0 per cent and then declinedto a low of 5.9 percent in May 2006. But, with the onset of the recession begin-ning in December 2007, the rate turned up to 9.4 percent, adding 261,000workers to the unemployment rolls. In last year’s Annual Report, we venturedthe hope that the recession was over, but the August 2011 unemploymentreport and other recent economic reports here in Canada and in the UnitedStates hint that we may be headed toward a double dip recession. The seeds for this decline and instability were not sown in Ontario.All developed economies are undergoing this turmoil. Ontario and Canadahave experienced less economic volatility than many other countries, andwe do not face the same level of challenges most do. Many have trulydaunting government deficits and debt loads, high average lengths ofunemployment, and financial systems that are still not back to full health.But we cannot be complacent, especially as economic indicators around theworld become more discouraging.  7
  • Our economy is standing still while other jurisdictions stay ahead of, or gain, on us. Exhibit 1 Ontario ranks among the leading international peers 2009 GDP per capita (C$ 2010) Ontario and international peers Hessen (GER) $52,600 Bayern (GER) Lombardia (ITL) Baden-Württemberg (GER) New South Wales (AUS) Ontario $45,600 Kanto (JP) $45,000 Median Cataluña (SPA) Vlaams Gewest (BEL) Nordrhein-Westfalen (GER) Rhône-Alpes (FRA) Kinki (JP) South East (UK) $39,800 Note: Because of limited GDP data on Kanto & Kinki, Japans national GDP growth rate from 2008 to 2009 is used to estimate Kanto & Kinkis GDP in 2009. All currencies converted to Canadian dollars using PPP. Source: Institute for Competitiveness & Prosperity analysis based on data from Statistics Canada; Australian Bureau of Statistics; Ontario Ministry of Finance; Statistische Ämter Des Bundes Und Der Länder; Regional Statistical Yearbook Lombardia; National Bank of Belgium; Institut national de la statistique et des études économiques (INSEE); SNA Statistics National Accounts of Japan; Japan Statistics Bureau & Statistics Center; UK Office of National Statistics; Instituto Nacional de Estadística; Eurostat; OECD and IMF. Exhibit 2 Ontario trails its North American peers 2010 GDP per capita (C$ 2010) Ontario and North American peers New York $71,200 Massachusetts New Jersey Virginia California Illinois Texas Pennsylvania Median $54,200 North Carolina Indiana Ohio Georgia Florida Michigan Ontario $46,500 Québec Note: US GDP numbers converted to Canadian dollars using 2010 PPP. Source: Institute for Competitiveness & Prosperity analysis based on data from Statistics Canada; Ontario Ministry of Finance; Banque de données des statistiques officielles sur le Québec; US Department of Commerce, Bureau of Economic Analysis and US Census Bureau.8  PROSPECTS FOR ONTARIO’S PROSPERITy
  • Even with all the economic uncertainty in the air, our message to Ontariansremains the same as it has been over the decade: we have great strengths as aprovince and yet we seem not to be able to achieve our full prosperity poten-tial. We offer no silver bullets or quick fixes to propel us out of this inertia.Instead, we recommend an ongoing Prosperity Agenda that takes us in theright direction and will pay off in the long term. We have seen some good progress on some aspects of our Agenda in recentyears. But, in many ways, our economy is standing still while other jurisdic-tions stay ahead of or gain on us. Among large advanced economies, we are one of the most prosperous, outpacing most regional economies in Europe, Japan, and Australia in GDP percapita (Exhibit 1). Our businesses, workers, and governments generate morevalue from our endowment of resources than most large diverse economiesaround the world. But, closer to home, in populous states and provinces in North America,Ontario ranks a dismal fifteenth out of sixteen. In 2010, Ontario trailed themedian of these North American peers by $7,700 per capita or 14.2 percent(Exhibit 2). (In all our analyses, unless otherwise stated we use constant 2010dollars converted at the Canada/US purchasing power exchange rateof 1.203.) This has changed little since 2002, when the gap was $6,300. Back in 1981,Ontario stood above the median. But through the recession of the early 1990s,we fell behind these large US states and have not been able to rank better thanfourteenth in the last decade (Exhibit 3). Exhibit 3 Ontario’s prosperity gap widened slightly in 2010 000 GDP per capita (C$ 2010) 1981–2010 $80 Peer leader 60 Peer median Ontario 40 20 0 ‘81 ‘85 ‘90 ‘95 ‘00 ‘05 ‘09 ‘10 Ontario Rank 8th 10th 13th 15th 15th 15th 14th 15th Prosperity lead/(gap) $400 ($600) ($1,800) ($5,700) ($7,500) ($6,500) ($7,100) ($7,700) Note: 1997 shows the break in the US method of calculating state-level GDP from SIC-based to NAICS-based. US state GDP numbers are converted to Canadian dollars using 2010 PPP. Source: Institute for Competitiveness & Prosperity analysis based on data from Statistics Canada; Ontario Ministry of Finance; US Department of Commerce, Bureau of Economics Analysis and US Census Bureau.  9
  • We continue to believe that Ontario’s true benchmarks are other large,developed provinces, states, and regions around the world. But, to make more OntariO gdpconcrete this sense of economic drift in Ontario, it is also worth examining ourstanding inside Canada. per capita (c$ 2010) Our economic performance is falling behind that in other Canadian provinces.Against the three provinces where resource development accounts for morethan 30 percent of their GDP – Alberta, Saskatchewan, and Newfoundland &Labrador – Ontario fares poorly (Exhibit 4). This comparison is not particu-larly apt, as it is hard to credit these provinces with great economic policy 2001 $45,600when they benefit significantly from the increase in world prices of oil andother commodities. However, against the other non-resource provinces,Ontario’s performance has not shone either. No doubt, this is partly becauseour manufacturing industry has been severely hurt by the dollar and thecurrent global downturn. But we cannot expect a turnaround in this area. Sowe have to build a more innovative economy – the key to thriving in theincreasingly competitive global environment. In taking stock of the past decade, we have some significant accomplish- 2010 $46,500ments to point to. They are more public policy accomplishments that buildOntario’s capabilities, rather than private sector achievements. None willfix things quickly, but they put Ontario on the right track to build a morecompetitive and prosperous economy. Exhibit 4 Ontario’s GDP performance compared to other Canadian provinces has been lackluster 000 GDP per capita (C$ 2009) Canadian provinces, 2001–2009 $70 65 Resource-based economies (Alberta, Saskatchewan and Newfoundland and Labrador*) 60 $18,900 55 $15,400 50 45 Ontario $4,300 $7,700 40 Non resource-based economies (British Columbia, Manitoba, Québec, 35 New Brunswick, Nova Scotia, and Prince Edward Island ) 30 25 2001 2004 2007 2009 * The resource-based provinces with more than 30% of GDP from natural resources. Source: Institute for Competitiveness & Prosperity analysis based on data from Statistics Canada.10  PROSPECTS FOR ONTARIO’S PROSPERITy
  • • In our First Annual Report, we concluded that Ontario was not investing adequately in post secondary education. In that Report and in our subsequent work, we recommended that Ontario residents and its governments invest more in developing our human capital. In 2005, the provincial government introduced Reaching Higher, a $6.2 billion increase in funding for post secondary education. These investments in our colleges and universities created more spaces for our students at undergraduate and gradu­ ate levels. We have seen a steady increase in admissions to our colleges and universities. This fall, enrollments in our universities reached an all­time high with 90,000 new students. In colleges, most recent data for the years 2009 and 2010 also indicate a record high registration. Given the importance of post secondary education in strengthening the skills of Ontarians and on local economic development, these investments will pay off.• Through much of our work, we have been vociferous critics of our tax system. Our focus has been on the punishingly high marginal effective tax rates on new business investment. In our Seventh Annual Report, we observed that Ontario had the highest rates of taxation on new business investment among developed economies. Our corporate income tax rates were higher than those of many of our trade partners; we had an antiquated sales tax that piled tax on top of tax as businesses invested; and we had a capital tax to punish previous business investments. But our governments have been working at improving our tax system. In 2007, the federal government announced a stepped reduction in federal corporate income taxes – with rates falling from 22 percent in 2007 to 15 percent in 2012. Federal and provincial governments have eliminated capital taxes in Ontario. And, best of all, the provincial government converted our retail sales tax to a value added tax in 2010 and reduced corporate income taxes here in Ontario. The net effect is that Ontario’s tax regime has moved from worst among developed economies to being better than average. Again, we shouldn’t expect investment to increase dramatically overnight – and the improvements are not yet fully implemented – but we can now point to our tax system as a competitive advantage.• The Task Force has been urging the federal and provincial governments to expand international trade, an important element for improving our innovation capabilities. On the one hand, expanded trade means more export opportunities for Ontario businesses to reach larger markets to supplement our own, and to help support businesses as they grow and afford the investments in the innovation necessary to be competitive. Our businesses also benefit from the pressure exerted by more sophisticated customers from around the world.  11
  • On the other hand, more imports put pressure on our businesses, forcing them to expand their capabilities to meet new competitive threats. Some of our busi­ nesses are stretched too far by this competition and exit, as was the experi­ ence observed in Canada after the Canada­US Free Trade Agreement of 1987. In the past decade, Canada has negotiated several new bilateral trade deals. Currently, with the urging of Ontario and Québec, Canada is negotiating a freer trade deal with the European Union. And we are at the early stages of nego­ tiations with India and Brazil. While the US government sends mixed signals on its desire to expand trade, Canada is openly seeking new trade relations, and Ontario has been a significant partner with the federal government in this enlightened stance.• The Task Force has some accomplishments in ending bad public policy. In particular, we have been consistent proponents of ending special tax treat­ ment for particular kinds of venture capital, namely Labour Sponsored Investment Funds (LSIFs). Based on the mistaken premise that Ontario’s innovative startup firms need access to greater quantity of capital, regardless of its quality, the Funds offered generous tax benefits to individual “retail” investors. These investors generated a return through RRSP tax breaks. They were less interested in, and capable of, supporting specific startups with experience and specialized knowledge – as important to startups as capital. Because LSIFs did not attract sophisticated investors and suffered from other design flaws, they did not help raise the quality of venture capital – at great cost to the taxpayer. In August 2005, the provincial government announced the end of the special tax benefits for LSIFs by 2012. We encourage the incoming government to keep their demise on schedule. These accomplishments are important steps in the right direction. But ifour economy is to reach its full potential for the future prosperity of today’sOntarians and our children, we have to step up our innovative capabilities.More of our businesses have to compete globally on the basis of uniqueproducts, services, and processes. Our prosperity gap is a productivity gap, and our productivity gap is aninnovation gap. When economists observe that productivity in Canada andOntario is lagging, they are seeing the results of a sub-standard innovationrecord among our businesses. Improving innovation has to be our priority forthe coming decade.We urge the new Ontario government to embrace our 2020 ProsperityAgenda and thus achieve our innovation and prosperity potential.When the 2021 Annual Report is written, we hope that all Ontarianswill look back on a decade of real accomplishment.12  PROSPECTS FOR ONTARIO’S PROSPERITy
  • We continue to propose actionsthat will help Ontario realize our2020 Prosperity Agenda.Exhibit 5 The Task Force has set out a 2020 Prosperity Agenda to narrow our prosperity gap Goal: Raise innovation, Looking back Looking forward productivity, and prosperity 2001–2011 2011–2020 Prosperity gap Fell to 20th among 28 international Rank as 10th most prosperous and North American peers among North American and international peers Work effort and productivity Worked more but not smarter – Become a global leader in innovation Ontario is a productivity laggard and productivity Human capital Increased our investment in education Attain more master’s degrees in our universities Improved performance in attainment of post secondary degrees Strengthen managerial capacity Progressed little in managerial capacity Investment Lagged peers’ business investment in Rise to the challenge of globalization innovative technologies or R&D by businesses investing to raise their capabilities Improved tax policy to support business investment Introduce real innovations in federal and provincial tax policy Shifted balance away from education to health care Ensure deficits are not fought through severe cuts in education Support and pressure Completed several small trade deals Focus on large-scale trade deals Announced end to special tax Pursue policies to enhance venture treatment for Labour Sponsored capital quality and identify innovation Investment Funds financing models  13
  • ourProsPeritygaP isa ProductivitygaP14  CHAPTER
  • in cArrying out its mAndAtE to along the way add value at every step. and services will increase the GDP ofmeasure and monitor Ontario’s A sandwich bought in a restaurant a region – and usually earn highercompetitiveness and prosperity, the begins with a farmer sowing and wages and profits for themselves.Task Force has focused on Gross harvesting grain. Between the farmerDomestic Product (GDP) per capita as and the consumer are many inte- Innovation is a key to higher valuethe summary measure of success. grated steps, where value is added by added. This is true whether it is theOver the decade, we have concluded intermediaries – both by manufactur- driver in creating better products orthat our performance has lagged that ers, like a bakery, and by service services without increasing costsof our peers in the United States and providers, like a restaurant. Value faster than prices, or in makingabroad, giving rise to a large and added at each stage is shared production processes leaner withoutwidening prosperity gap. between the worker and the business lowering quality. owner – higher value added meansGDP is highly correlated with higher wages and profits – and The advent of globalization has seenaggregate personal income and this continues until a good or the movement of low value addedwages in an economy. Wage earners service is produced and provided processes to lower wage countriesin Ontario receive about 55 percent of to a final consumer. The total value like China and India. Advancedtotal GDP, and wages increase along added throughout the production economies like Ontario will notwith GDP. GDP is also the key driver chain is the sum of each of the thrive by attempting to hang on toin government revenues, so that individual processes. low value added activities. Rather,public services can be afforded when they must innovate relentlesslyGDP grows. As we have discussed in Understanding value added is an to deliver higher value addedpast reports, our lagging GDP has real important step in addressing innova- products, services, or processes –negative consequences for average tion and productivity issues. and higher GDP.Ontarians. Wages, living standards, Companies with higher value addedand public investments are lower processes are likely to produce more 1 Centre for the Study of Living Standards, Does Money Matter? Determining the Happiness ofthan they would be if economic innovative and more complex Canadians, November 2010, updated February 2011, available online: http://www.csls.ca/performance were comparable to that products – and have higher produc- reports/csls2010-09.pdfof our peers. tivity. Their products and processes 2 Institute for Competitiveness & Prosperity, Working Paper 14, Trade, innovation, and are also more defensible in the global prosperity, September 2010, pp. 39­43.GDP also correlates with personal market place, making the homehappiness as measured across country more competitive. Thecountries by organizations industries that were most immune tolike Gallup. Our own work in the overall turndown in manufactur-collaboration with the Centre for ing between 2002 and 2008 pro-the Study of Living Standards has duced products with higher valueshown that in Canada personal added and drew on more creativeincome is positively correlated with skills in their operations.2reported happiness.1 Value added also matters to a countryGDP represents the “value added” or region. Essentially a country’s orto our endowed base of human, region’s GDP is the sum of all thephysical, and natural resources. value added in the economy. PeopleAs products and services are created, and companies that innovate anddifferent people and organizations produce higher value added products  15
  • four factors measure • Productivity. For each hour worked Profile remains an advantageontario’s prosperity gap in a jurisdiction, how much economic for Ontario. The percentage of the output is created by a jurisdiction’s population that is of working age –Ontario has a significant prosperity workers? aged 15 to 64 – is the demographicgap, as measured by GDP per capita. basis for prosperity. With moreOut of sixteen North American The first three factors – profile, people in that age range, a higherpeer jurisdictions, Ontario stands utilization, and intensity – add up to percentage of the population canfifteenth, and the gap versus the our work effort, or the hours worked work and create economic value.median has been widening. To under- per capita to create economic value. In Ontario, this ratio has been stablestand the reasons for this prosperity The fourth factor – productivity – over the short run and has had nogap, we draw on the same framework measures how effectively we add appreciable impact on changes inwe have used in our previous reports value to resources, thereby creating our prosperity gap versus our peerto disaggregate GDP per capita into economic value and prosperity. states. Nevertheless, it creates anfour measurable elements (Exhibit 6): ongoing starting advantage in In 2001, Ontario lagged its North Ontario’s prosperity.• Profile. Out of all the people in a American peers in both work effort jurisdiction, what percentage are and productivity. A decade later, In 2010, 69.4 percent of Ontarians of working age and therefore able Ontario matches peer states in work were aged 15 to 64. Among the to contribute to the creation of effort but lags more in productivity peer jurisdictions, Ontario and products and services that add (Exhibit 7). That means our pros- Québec have a higher percentage of economic value and prosperity? perity gap is now a productivity gap. working age population than the And, as we’ll see, our productivity fourteen peer states. Relative to the• Utilization. For all those of working gap is an innovation gap. 67.3 percent median of the sixteen age, what percentage is actually peer jurisdictions, Ontario has a working to add to economic value ontario has good work effort 3.0 percent potential profile and prosperity? performance advantage.3 Holding all other factors Ontario continues to have a demo- constant, we calculate this advantage• Intensity. For all those who are graphic profile advantage versus the to be worth $1,800 in per capita GDP. employed, how many hours do they peer states and Québec, an advan- spend on the job in a year? tage in utilization, but a significant 3 Calculated as 1 minus [67.3 (Peers)/ 69.4 (Ontario)] = 3.0 percent. intensity gap (Exhibit 8). Exhibit 6 The Task Force measures four components of prosperity Prosperity Profile Utilization Intensity Productivity Potential labour force Employed persons Hours worked GDP GDP per capita Population Potential labour force Employed persons Hours worked • Participation • Industry mix • Employment • Cluster mix • Cluster effectiveness • Urbanization • Education • Capital investment • Productivity residual Source: Adapted from J. Baldwin, J.P. Maynard and S. Wells, “Productivity Growth in Canada and the United States,” Isuma Vol. 1 No. 1, Spring 2000, Ottawa Policy Research Institute..16 PROSPECTS FOR ONTARIO’S PROSPERITy
  • Exhibit 7 Higher productivity is needed to close Ontario’s prosperity gap Source of Ontarios prosperity gap with North American peers (C$ 2010) Work effort (Hours worked per capita)1,000 North American peer median 900 Prosperity gap (GDP per capita) Ontario $60,000 North American 800 peer median 50,000 700 Ontario 1981 1990 2000 2010 40,000 Productivity (GDP per hour worked) $70 North American peer median 30,000 60 20,000 50 Ontario 1981 1990 2000 2010 40 30 1981 1990 2000 2010Note: Currency converted at PPP = 1.203. In 1997 state GDP calculation method changed from SIC-based to NAICS-based.Source: Institute for Competitiveness & Prosperity analysis based on data from Statistics Canada; US Bureau of Economic Analysis; US Bureau of Labor Statistics;US Census Bureau.Exhibit 8 Lagging productivity accounts for most of our prosperity gap Elements of GDP per capita (C$ 2010) $1,300 $1,200 $1,500 $1,800 $2,000 $54,200 $4,100 $46,500 $6,000 $1,500 $1,200 $1,000 $1,700 Prosperity Gap $7,700 or 14.2% of median GDP per capita Work effort advantage Productivity gap $200 $7,900 Median GDP Profile Participation Employment Intensity Industry Cluster Cluster Urbanization Education Capital Productivity Ontarios per capita mix mix effectiveness investment residual current GDP per capita (85.8% of median) Profile Utilization Intensity ProductivitySource: Institute for Competitiveness & Prosperity analysis based on data from Statistics Canada; Ontario Ministry of Finance; Banque de données desstatistiques officielles sur le Québec; US Department of Commerce, Bureau of Economic Analysis; Bureau of Labor Statistics; US Census Bureau. OUR PROSPERITy GAP IS A PRODUCTIVITy GAP 17
  • Over the last decade, laggingproductivity has accounted for thegreatest share of Ontario’s prosperitygap with our peers, and in 2010 thisproductivity gap widened further.Demographic projections indicate In the other component of utilization, worked 1,670 hours, while at thethat, as in Québec, the proportion of employment, Ontario has an advan- median of the peer states, the averageOntarians of working age will decline tage over our US peers – even though employee worked 1,830 hours. Thisover the coming decades as baby our own performance has been poor. gap of 160 hours, or 4.3 weeksboomers retire and are not replaced In 2010, our annual unemployment annually, widened slightly fromby equal numbers in subsequent rate decreased to 7.9 percent, down 2009, when Ontario trailed the peergenerations. Still, the projections from 8.3 percent in 2009.8 This is median by 150 hours weekly or 4.1indicate that Ontario will maintain lower than the median rate across weeks. In 2010, our intensity gapits advantage versus its peers.4 peer jurisdictions of 9.8 percent. In equated to $4,100 in GDP per capita. other words, on average throughNevertheless, Ontario will have 2010, 92.1 percent of those Ontarians Ontarians’ propensity to take morefewer workers to create prosperity in participating in the work force had weeks of vacation and to have athe coming years. We estimate that full-time or part-time work, which higher percentage of part-time workby 2025 the smaller percentage of was higher than the median perfor- is the key driver of the intensity gap.9working age Ontarians will reduce mance of the peer jurisdictions, 90.2. Another factor behind the intensityGDP per capita potential by $2,300.5 This 1.9 percentage point advantage gap is the inability of part-timeWe will need creative retirement lifted our relative GDP per capita per- employees to find full-time work.solutions to address this decline in formance by $1,200 in 2010. This gap is felt most by severalour prosperity potential.6 disadvantaged groups, such as high In summary, in 2010, Ontario school dropouts and lone parents.Ontario has higher utilization employed 60.1 percent of its workingthan the peer states. Over the age population (the combined effect As we have seen, in the three workpast decade, Ontario has been more of a 65.2 percent participation rate effort factors, Ontario has a profilesuccessful than our peer states in and a 7.9 percent unemployment advantage, the percentage of ourcreating jobs. We perform well in the rate), ranking third among the sixteen population of working age, and atwo factors that make up utilization peer jurisdictions and above the peer utilization advantage, the percentage– relatively high labour force partici- median of 58.1 percent. This superior of Ontario adults who are working.pation rates and relatively low performance translates into a $2,500 Still, the intensity gap, our lowerunemployment rates. utilization advantage (the combined effect of a $1,300 participation 4 Task Force on Competitiveness, Productivity and Economic Progress, Fourth Annual Report,We rank fifth among the peer juris- advantage and a $1,200 employment Rebalancing priorities for Ontario’s prosperity,dictions in workforce participation. In advantage) in GDP per capita. November 2005, p. 29. 5 This comparison is between Ontario’s GDP per2010, 65.2 percent of Ontarians fifteen capita in 2005 and its potential in 2025; not the difference between Ontario and its peer group.years of age and older worked or sought Ontario employees work fewer 6 Institute for Competitiveness & Prosperity,work.7 The median participation rate hours than their US counter- Working Paper 9, Time on the job, September 2006, p. 21.was 63.7 percent. The US recession hurt parts – and this intensity gap 7 Statistics Canada reports Ontario’s participationparticipation rates, as many workers just remains a significant part of rate to be 67.1 percent; US definitions for who qualifies for inclusion in the labour force, andgave up looking for employment – and our prosperity gap. While therefore is included in the participation rate,were not counted in the participation Ontario has better demographics and differ from Canada’s definitions. We use US definitions for our calculations of differencesrate. Ontario’s participation rates have creates more jobs, we have a signifi- between Ontario and its US peers.also fallen during the recession. But we cant intensity gap – our workers are 8 These unemployment rates are based on US definitions; official Canadian unemployment ratescontinue to out perform our peers. In on the job fewer hours in a year than were 8.7 percent in 2010, down from 9 percent2010, Ontario’s advantage translated their counterparts in the peer states. in 2009. 9 Working Paper 9, Time on the job, pp. 22­24.into $1,300 in GDP per capita. In 2010, the average Ontario worker18  PROSPECTS FOR ONTARIO’S PROSPERITy
  • number of hours worked per worker, the presence of clustered industries relative employment strength incontinues to be a major factor in our in a region has a positive spillover financial services, automotive, metalprosperity gap. effect, in that they typically generate manufacturing, publishing and print- opportunities for increased success of ing, and other industries has created anThe net effect of these factors is a the local economy. attractive mix of clustered industries.$200 advantage versus the median of Ontario’s cluster mix yields a $1,500our peer jurisdictions. This relative The other major industry type per capita advantage over our peers.strength in work effort is overwhelmed, includes dispersed industries, or localhowever, by our poor productivity. industries. These industries, such as Cluster under performance is retailers and restaurants, tend only to a significant part of Ontario’shigher productivity is serve their local markets and so do productivity gap. While Ontarioneeded to close ontario’s not realize economies of scale and are has an excellent industry and clusterprosperity gap less challenged to be innovative. As a mix, cluster effectiveness, as mea-Over the last decade, lagging consequence, they have lower rates of sured by wages, is much lower thanproductivity has accounted for the productivity, innovation, and wages. that in the peer states. In the samegreatest share of Ontario’s prosperity clusters, wages in Ontario firms aregap with our peers, and in 2010 this A third industry type, natural lower than those of their counter-productivity gap widened further. Six endowment industries, is located parts across the peer states.elements of productivity determine where the natural resources arethe impact of this key driver of our found. These include forestry, Across all clustered industries, theprosperity gap: mining, and agriculture. These are average wage in Ontario is 14.7 very small industries for both our percent lower than the average in the• Mix of industries overall peers and Ontario – accounting for median peer state. This lower wage• Mix of clustered industries less than 1 percent of employment in reflects lower productivity and• Productivity effectiveness of our Ontario in 2010. innovation in our clustered indus- clustered industries tries, which in turn reduces economic• Degree of urbanization Fully 34.1 percent of employment in performance across all industries.• Educational attainment Ontario is in the 41 clustered indus-• Capital investment tries versus the median of 27.7 10 See http://data.isc.hbs.edu/isc/cmp_overview.jsp for a description of the three types of industries. percent in the peer jurisdictions. We Note: we refer to Porter’s “traded industries” as “clustered industries” and his “local industries” asIndustry mix contributes estimate the potential productivity “dispersed industries.”positively to our productivity. benefit from this higher percentage of 11 Institute for Competitiveness & Prosperity, Working Paper 1, A View of Ontario: Ontario’sOntario benefits from a mix of indus- clustered industries in our industry Clusters of Innovation, April 2002, and Workingtries that is more heavily weighted mix contributes $2,000 per capita. Paper 5, Strengthening structures: Upgrading specialized support and competitive pressure,toward clustered industries,10 and This benefit is derived from a higher July 2004.within these clustered industries, we output than should be achieved from 12 It is important to note that our measure focuses on the mix of industries only. It calculates thehave a mix that is more favourable for a better industry mix.12 productivity performance we could expect inproductivity and prosperity than that Canada if each cluster were as productive as its US counterpart. It does not measure thein the peer states.11 The geographic Within clustered industries, effectiveness of our industries in Canada.clustering of firms in the same and Ontario has a beneficial mix.related industries increases productiv- Some of the 41 clustered industriesity and innovation. These clustered contribute more to productivity andindustries typically sell to markets innovation than others – so the mix ofbeyond their local region. In addition, clustered industries matters. Ontario’s OUR PROSPERITy GAP IS A PRODUCTIVITy GAP 19
  • As we discuss in our review of Relatively low urbanization is a productivity would be higher by $1,200Ontario’s innovation results, Michael significant contributor to our per capita. As we shall see, Ontario hasPorter has observed that specialized productivity and prosperity narrowed this educational attainmentsupport from excellent factor condi- gap. Urban centres lead to higher gap over the last decade; when updatedtions, capable suppliers, and related productivity as a result of the educational attainment and wageindustries pushes innovation higher increased social and economic information is available from thein traded clusters. At the same time, interaction of people in firms in latest census, we expect this disad-more competitive pressure from metropolitan areas, the cost advan- vantage in GDP per capita to shrink.sophisticated customers and vigorous tages of larger scale markets, and arivals drives innovation. As we have more diversified pool of skilled Lower capital investmentdiscussed in the past,13 our structures labour. The interplay of these factors reduces productivity. Ontarioof specialized support and competi- promotes innovation and growth in businesses have under invested intive pressure are inadequate relative an economy. machinery, equipment, and softwareto the experience in clusters of traded relative to their counterparts in theindustries in the peer states. In other Since fewer people live in metro- United States, so that the capital baseresearch, we have found that Ontario’s politan areas in Ontario than in the that supports workers in Ontario isclustered industries draw less on peer states, our relative productivity not as modern as that of theirworkers in creativity-oriented and prosperity potential are lower. counterparts in the peer states.18 As aoccupations than their counterparts Our analysis this year indicates that result, Ontario workers are not asin the peer states.14 Another source of we have a $1,500 per capita dis- productive. This under investment inclustered industries’ under perform- advantage against the peer median capital equipment lowers Ontario’sance is the smaller scale of operations that is related to our lower level of productivity by $1,000 per capita,in our manufacturing facilities. (See urbanization. based on our simulation of Ontario’sOur manufacturers need to increase GDP if our economy had matched thethe scale of their operations.) Lower educational attainment rate at which the US private sector weakens our productivity.If Ontario clusters were as effective Economists agree that a better 13 Task Force on Competitiveness, Productivity and Economic Progress, Third Annual Report,as US clusters, wages would be educated workforce will be more Realizing our prosperity potential, November 2004, pp. 40­48.$14,000 per worker higher. As productive. Education increases 14 Idem. Eighth Annual Report, Navigating throughclustered industries account for 34.1 workers’ base level of knowledge and the recovery, November 2009, pp. 27­29.percent of Ontario employment and increases the flexibility necessary for 15 We have netted out the effects of Ontario’s lower urbanization, our under investment in capital, and ourgiven the relationship between wages improved job performance and lower educational attainment in this calculation.and productivity, our overall produc- ongoing skills gains. Many studies 16 For example, see Ana W. Ferrer and W. Craig Riddell, “The Role of Credentials in the Canadiantivity would rise by 14.3 percent.15 show that increased wages accrue to Labour Market,” Canadian Journal of Economics, 2002, Vol. 35, No. 4; Statistics Canada,From this, we estimate the productivity more highly educated individuals.16 “Education and earnings,” Perspectives on Labourloss from the lower effectiveness of And higher wages are the result of and Income, 2006, Vol. 38, No. 3; and Anil Verma, “Low Wage Service Workers” A Profile,” Workingour clusters to be $6,000 per capita. higher productivity.17 Ontario’s Paper Series: Ontario in the Creative Age, Martin Prosperity Institute, March 2009. population has, on average, a lower 17 Task Force on Competitiveness, Productivity andAdding together the effects of level of educational attainment than Economic Progress, Sixth Annual Report, Path to the 2020 Prosperity Agenda, November 2007,industry mix (+$2,000), cluster mix those living in the United States, p. 30.(+$1,500), and effectiveness Adjusting the mix of educational 18 Capital investment results are not available at the sate level. Our analysis uses US results to(-$6,000) Ontario’s clustered indus- attainment in Ontario to match the estimate peer state investments and comparestries provide a net loss of $2,500 in US mix and holding wages constant these to Ontario.GDP per capita versus the peer states. at each attainment level, Ontario’s20  PROSPECTS FOR ONTARIO’S PROSPERITy
  • our manufacturers need to increasethe scale of their operationsOntario manufacturers need to increase the size of their operations,because larger facilities have more investment in technology, aremore likely to support R&D investments, and are more productive.Research by the George Morris Centre and the Institute for food industry, our processors tend to be much smaller. FromCompetitiveness & Prosperity shows that our food process­ a public policy perspective, infrastructure investments, suching industry could increase its productivity with bigger facil­ as those in border crossings are required. And, despiteities. Food processors whose size, as defined by sales per Canada­US free trade, the border still matters. Foodestablishment, puts them in the top quartile create twice as processors looking to expand production in sectors like dairymuch value added per employee as the average sized facility and poultry are challenged to secure access to producers(Exhibit A). with adequate quota volumes. So we also need to take a To improve the productivity and innovation in manufactur­ hard look at our supply management policies in agriculture,ing in general – and food processing in particular – our and the unintended effects these policies may have onbusinesses need to explore consolidation opportunities and manufacturing industries.strategies for serving larger markets. Compared with the US Exhibit A Larger food processing facilities are more productive Value added per employee 2004–2008 $000/ employee $120 Largest facilities (top quartile by employment) 90 60 Mid-sized facilities (2nd and 3rd quartiles) 30 Smallest facilities (bottom quartile)  0 2004 2005 2006 2007 2008 Source: Institute for Competitiveness & Prosperity and George Morris Centre analysis based on Statistics Canada special tabulation of data from Annual Survey of Manufactures. OUR PROSPERITy GAP IS A PRODUCTIVITy GAP 21
  • invested in machinery, equipment, It is difficult to project what will Our current challenge is to recoverand software. An important part of happen in this unusual downturn – from the recession and to buildthis capital investment gap is in it is quite likely that official data will our full prosperity potential for thepurchases of information and be revised. But our productivity benefit of all Ontarians. But forcommunications technology (ICT). weakness is real and getting worse the long term, higher productivity (see Exhibit 3), widening our is critical to our success. AndThe residual is related to prosperity gap. Sluggish productivity improving our productivityproductivity. We have been able to growth is a critical reason we are means improving our innovationaccount for the impact of profile, not realizing our prosperity performance.utilization, and intensity on prosper- potential. And, as we broaden ourity. We have also accounted for the perspective beyond North America, 19 Task Force on Competitiveness, Productivity and Economic Progress, Ninth Annual Report, Today’seffects of several elements of pro- we see that Ontario’s productivity innovation tomorrow’s prosperity, Novemberductivity. The $1,700 per capita gap lags globally as well. 2010, pp. 27­28.that remains is related to productivityon the basis of like-to-like industry Ontarians have built one of the mostmix and strength, urbanization, globally competitive jurisdictions.education, and capital intensity. Ontario’s prosperity compares favourably with that in thirteenProductivity deficit international peer regions – selectedis worsening using similar criteria for identifying North American peers.19 OntarioThrough most of the 1980s, Ontario’s stood sixth in GDP per capita in 2010prosperity was close to the median of (see Exhibit 1). However, just as wethe peer states. During that period, have found in comparisons withwe had a productivity and intensity North American peers, we trail thedisadvantage versus our peers – but median of our international peers inour utilization advantage compen- productivity (see Exhibit 14). Wesated for this. Our prosperity gap work more than those outside Northbegan to develop at the outset of the America, but we are less successful at1990–92 recession, driven mostly by adding economic value in the hoursour worsening participation and we work. These international com-unemployment rates. parisons again indicate that lagging productivity remains Ontario’sThis utilization problem began to problem to solve.dissipate around 1997, and by 2001 itwas an advantage again. However,our productivity disadvantage beganto grow in 1995, and by 2005 it hadmore than doubled. In the currenteconomic downturn, work effort hasfallen off much more in the peerstates than in Ontario, while produc-tivity has grown faster than Ontario’s.22 PROSPECTS FOR ONTARIO’S PROSPERITy
  • a ten-yearretrosPectiveand outlookfor the future
  • As wE dElivEr our tEnth AnnuAl rEport to the public of Ontario, weconsider progress and accomplishments in several areas. Overall, we have tobe disappointed in the lack of progress of our competitiveness and prosper-ity. As we have shown, Ontario trails our North American peers significantlyin GDP per capita and this gap has widened through the decade. Against ourinternational peers, we continue to out perform, but our lead is shrinking. Tounderstand what has happened and offer an outlook for the future, we look atfour major factors in our prosperity performance.• We begin by detailing our progress in the two key drivers of prosperity – work effort and productivity. In both North American and international comparisons, Ontario performs very well in work effort – we excel at creating jobs for our people. But we trail both sets of counterparts in productivity. Productivity measures our ability to develop innovative processes and to create and market new products and services. We are laggards among our peers, and the gap is widening. As we look back and look ahead, we focus on the various elements thataffect our innovation and productivity:• We examine progress in building the capabilities of our human capital, assessing them overall and among managers. We also review our progress in reducing poverty• We assess the extent to which we have made investments in our people and businesses to achieve greater productivity and innovation• We review important parts of the support and pressure in our economy that lead to more innovation.As we review progress on our 2020 Prosperity Agenda, it is clear thatthere is no one magic solution hiding in the following pages – no silverbullet that will single handedly close our prosperity gap. Rather, we havework to do in many areas – from investing in our people, to developinginnovative business strategies, to tax reform, and to expandedinternational trade. So long as our political and business leaders andall Ontarians have a determination to achieve our full prosperitypotential and to work together on many fronts, we are confident inour outlook for Ontario.  25
  • what haPPenedin ontario in thePast decade? Work effort and productivity Human capital Federal GST reduced from 7% to 6% investment Minimum wage pressure and increases begin support Ontario: A Leader in Learning (Rae Report) released Provincial Capital Tax for manufactur- ing and resource Post secondary activities ends tuition freeze Reaching Higher launched 2002 2003 2004 2005 2006 2007 Recession ends New rules on over- time and work week Federal Working TSX low Highest Post secondary Income Tax 5,695 participation rate 68.7% tuition freeze ends Benefit (WITB) introduced New Canada Health Transfer and Canada Social Transfer Block Grants announced Lowest School atten- unemployment rate dance to age 18 5.9% made mandatory Mandatory retirement ends26  PROSPECTS FOR ONTARIO’S PROSPERITy
  • Internationally Educated Engineers QualificationBridging Program launched Nortel bankruptcy Ontario Cabinet Committee on Poverty Green Energy Act passed Reduction established Canada-EU trade Staged federal negotiations begin corporate tax reductions begin from 22% to 15% in 2012 Ontario manufacturing employment low 770,000 Putting Students First announced US recession Lowest begins participation rate 66.7% 2008 2009 2010 2011 2012 Federal GST reduced from 6% Student to 5% financial aid improvements announced TSX high Provincial Capital R&D review 15,073 Tax completely panel report released eliminated HST begins Compete to Win (Wilson Panel) released Highest unemployment rate 9.4% Canadian dollar high $1.08 Staged provincial corporate tax reductions begin from 14% to 10% in 2013  27
  • work effort andProductivityOntario’s prosperity growth needs to comefrom productivity growthtwo FActors drivE ontArio’s prospErity:• Work effort, how much work Ontarians are doing, expressed in hours worked per capita, and• Productivity, how much value we create when working, expressed as GDP per hour worked. Ontarians excel in the first factor – generating work hours per capita.We start with an excellent demographic base, as the percentage of ourpopulation that is of working age is the highest among our peers. We arevery successful in creating jobs for our working age population, and eachworker works more hours than our counterparts outside of North America,although we trail US workers. The net effect is that Ontarians are amongworld leaders in work effort. Our prosperity challenge is driven by the second factor, our trailingproductivity. It is the major factor behind our prosperity gap. Productivitygrowth comes from finding smarter ways to compete – through new operatingefficiencies and new products and services. That means that innovation andproductivity performance are nearly synonymous – and are the keys to ourfuture prosperity Productivity growth has no limits. Our work effort may become constrainedover time by our demographics. But our ability to become more productiveand prosperous will depend on translating our imagination and ingenuity intoeconomic competitiveness and success in the global economy.28  PROSPECTS FOR ONTARIO’S PROSPERITy
  • ontario’s demographics are an advantage Exhibit 9 Ontario has a demographic advantage over our peers prOfile: a lOOK aHead Percent of population aged 15 to 64 2001–2010 2010 2020 70% Ontario 69.4 OntariO North American 68 peer median 67.3 66 International 65.9 69.4 % 66.1 % peer median nOrtH american peer median 64 62 67.3 % 64.4 % 2001 2004 2007 2010 internatiOnal peer median Note: Projections are based on medium growth assumptions. Due to limited data, national profile projections are used for Kinki and Kanto (Japan), and Rhône-Alpes (France). 65.9 % 64.3 % Source: Institute for Competitiveness & Prosperity analysis based on data from Statistics Canada; US Census Bureau; Australian Bureau of Statistics; Statistics Belgium; Institut national de la statistique et des études économiques; LIstituto Nazionale di Statistica; Instituto Nacional de Estadística; UK Office for National Statistics; Statistisches Bundesamt Deutschland; Japan National Institute of Population and Social Security Research.why profile matters how ontario performs The projections also point to theProfile is the starting point in Ontario has a very advantageous importance of enabling our olderdetermining our prosperity potential. demographic profile (Exhibit 9). We workers to stay in the labour forceDemographic “profile” refers to the have a higher percentage of our popu­ longer – if they wish. We will benefitpercentage of the population that is of lation between the ages of 15 and 64 from more workers, and we are atworking age. Currently defined as than all our North American and inter­ the point where older workers arebetween ages 15 and 64, it is clear national peers. more active and healthier than inthat the upper age limit will likely rise the past. We need their experienceas life expectancy increases and outlook for 2020 and judgment.options for later retirement expand. On this factor, we can predict with To the extent that a society has more much more safety how the next fewworking age people, it also has more decades will turn out, as the key“human capital” able to contribute to variables – current age distribution,prosperity through work and support mortality rates, and fertility rates –activities. Here in North America, we are either set or change very slowly.take this factor for granted, as we have Based on projections done bybenefited from the baby boomers being Statistics Canada, we show thatof working age. However, countries Ontario’s demographic profile willlike Japan and those in continental worsen as the percentage of ourEurope are feeling the effects of an population that is of working age turnsaging population – with fewer young down. On the positive side, we will notpeople available to work and more be disadvantaged as a result of this,elderly people requiring social and because other jurisdictions will farehealth care assistance. worse than us. Immigration has and will continue to benefit our demographic profile. But we need to make sure that we do a better job of integrating new arrivals into our economic mainstream. WORk EFFORT AND PRODUCTIVITy 29
  • ontario has high labour force participation rates Exhibit 10 Ontario has a higher participation rate than peers Participation rate 2001–2010 Labour force/ population (15+) 68% 66 Ontario 64 North American 62 peer median 60 International peer median 58 56 54 2001 2004 2007 2010 Source: Institute for Competitiveness & Prosperity analysis based on data from Statistics Canada; Bureau of Labor Statistics; US Census Bureau; Australian Bureau of Statistics; National Bank of Belgium; Statistics Belgium; Institut national de la statistique et des études économiques; Statistische Ämter Des Bundes Und Der Länder; LIstituto Nazionale di Statistica; Instituto Nacional de Estadística; UK Office for National Statistics; Statistics Bureau of Japan; SNA Statistics National Accounts of Japan; OECD; IMF; Eurostat.why participation rates matter workers, people not in the labour force phenomenon in Canada, and weParticipation rates are the next building may be enticed to enter it. When jobs encourage them in their efforts.block for economic progress. To the are scarce, many simply give up.extent working age people decide to outlook for 2020look for work and “participate” in the how ontario has performed We don’t foresee, nor do we suggest,labour force, our economic output will Our participation rate is a real strength any dramatic increases in our overallincrease. The participation rate for Ontario (Exhibit 10). In 2010, it participation rates. But there are someincludes those who are successfully generated a $1,300 advantage for groups in our society who are underemployed and those who are actively Ontario versus its peer states. Over the represented in the work force –looking for work – the unemployed. last decade, our advantage versus US most significantly, persons withThose of working age who are not peers has widened slightly. disabilities and Aboriginal people.actively looking for work are not Few, if any, economically advanced Current policy in Ontario is encouragingincluded in the participation rate. Nor jurisdictions around the world match work places and public places to beare they counted as unemployed. Ontario’s participation rates. Interna­ more accessible. But our Aboriginal Working age adults can choose not tional peers trail us, because women population is still not fully attached toto participate in the labour force for have not engaged in the work force to the labour force. We need to addressseveral reasons – they are raising the same extent as here, and younger this economic and social problem.children, attending school, or are less skilled adults have given up. Nevertheless, even with significantphysically unable to work. Conse­ One disturbing phenomenon, increases in the participation rates ofquently, the participation rate in a particularly in the Uk, is the rise of these and other disadvantaged groups,developed economy typically does not NEETs – young people who are not in the overall participation rate will likelyexceed 70 percent of adults. education, employment or training. be stable. Robust participation rates indicate Long­term status as a NEET can bethe willingness of Ontarians to work quite worrisome, potentially leadingas well as their confidence that there to being in a permanent underclass.is a job out there for them. In some Anecdotally, social observers seesense, participation rates are as much NEETs as some of the seriousan effect of economic progress as well contributors to the Uk riots thisas a cause. When jobs are aplenty and past summer. We understandemployers are paying more to attract Statistics Canada is tracking this30  PROSPECTS FOR ONTARIO’S PROSPERITy
  • unemployment rates trended down through much of the last decade;until the current economic downturnwhy unemployment matters a high risk of living in poverty – high lower unemployment than Ontario.The unemployment rate measures how school dropouts, recent immigrants, But far fewer people are in the workmany of those wanting to work are single mothers, persons with disabilities, forces in those countries than here.unable to contribute to the creation of Aboriginal people, and unattachedeconomic value. Many see it as the individuals aged 45­64. They are more outlook for 2020key signal of our economic progress. likely to be unemployed and when We have no reason to expect Ontario’sIt is certainly correlated with GDP unemployed are much more likely to be unemployment rate to be a significantoutput, but it is only one measure, and poor.21 The federal government’s positive or negative factor versusthe potential for significant overall Working Income Tax Benefit is a step in our peers in achieving prosperity.prosperity gains from lowering the right direction – supplementing the Our challenge is to build a robustunemployment is typically limited. earnings of low skilled workers. It economy that invests capital andAn unemployment rate of 5 percent provides them an incentive to take on employs people, thereby raising ourmeans that 95 percent of the labour a job that may be low paying, but living standards. Where special publicforce is working. A one percentage helps them accumulate skills.22 Wage policy is required is in assisting at­riskpoint reduction is indeed a 20 percent insurance, which can help older groups secure the skills necessary forimprovement. However, it is an increase workers get back into the labour force, gaining employment.in jobs holders from 95 percent to is worth considering.2396 percent – an increase of just over 20 Ninth Annual Report, Today’s innovation, tomorrow’s prosperity, pp. 41­43.1 percent. how ontario has performed 21 Ibid., pp. 23­25. But policy exclusively focused on “job From a high of 6.6 percent in 2002, 22 Institute for Competitiveness & Prosperity and Open Policy Ontario, Time for a “Made in Ontario”creation” can be very costly with few unemployment steadily declined to Working Income Tax Benefit, September 2009.results. Much of the public expendi­ 5.6 percent in 2006 (Exhibit 11). 23 Institute for Competitiveness & Prosperity, Report on Canada 2011, Canada’s innovation imperative,ture on attracting large job creators to Over the same period, it fell faster in June 2011, pp. 59­60.North American states and provinces the North American peer states, buthas failed to achieve the desired result turned up dramatically after 2007.and, when successful, has cost about Currently, our unemployment is below$75,000 per new job.20 our North American peers for the third One priority has to be on reducing consecutive year.unemployment among groups who face International peers currently have Exhibit 11 Ontario’s unemployment rate fell and then rose again in the recession Annual unemployment rates Unemployment rate 2001–2010 11% North American peer median 9 Ontario 7 International peer median 5 3 2001 2004 2007 2010 Note: Unemployment rates for Kanto, Japan were calculated using a weighted average of Northern and Southern Kanto regional labour force data. 2010 values were not available for Kanto and Kinki, Japan. Source: Institute for Competitiveness & Prosperity analysis based on data from Statistics Canada and OECD Regional Statistics. WORk EFFORT AND PRODUCTIVITy 31
  • ontario is a leader in employing its people Exhibit 12 Ontario leads its peers in utilization of its working age population Utilization rate Employed persons/ 2001–2010 population (15+) 65% 62 Ontario 59 North American peer median 56 International 53 peer median 50 2001 2004 2007 2010 Source: Institute for Competitiveness & Prosperity analysis based on data from Statistics Canada; Bureau of Labor Statistics; US Census Bureau;Australian Bureau of Statistics; National Bank of Belgium; Statistics Belgium; Institut national de la statistique et des études économiques; Statistische Ämter Des Bundes Und Der Länder; LIstituto Nazionale di Statistica; Instituto Nacional de Estadística; UK Office for National Statistics; Statistics Bureau of Japan; SNA Statistics National Accounts of Japan; OECD; IMF; Eurostat.why the utilizationrate matters utilization advantage has been even more pronounced – typically 7 to 9 per­ Our ability toThe utilization rate measures how 24many of our adult population are centage points each year through the last decade. create jobs hasemployed and contributing to economic been a brightvalue creation. It combines the previoustwo factors – participation and unem­ outlook for 2020 This is a relatively bright spot in spot in Ontario’sployment. It represents the degree towhich Ontarians want to work and the Ontario’s economic performance. But our workers are not as productive economicability of our employers to create jobs. as those in other places. Most of performance. our improvement recommendationshow ontario has performed are, and will continue to be, in the areaOntario has had a utilization advantage of productivity. Our challenge is toover our North American peers in every improve productivity without excludingyear except 2001. Our propensity to lower skilled workers in our workcreate jobs has provided an average force, as is the case internationally.benefit of about $1,500 in GDP per Our aspiration is to have highcapita versus North American peers. employment and high productivity.In the current downturn, our utilization We need to continue to work at findingrate fell from 62.4 percent in 2008 to ways to open up job opportunities for60.1 percent in 2009 and changed our at­risk citizens so that they arelittle in 2010 (Exhibit 12). contributing to and benefiting from ourThe US decline was more severe prosperity growth.between 2008 and 2009, but theutilization rate turned up slightly in 24 Our utilization rate is generally known among economists as the “employment rate.”2010. Ontario continues to hold asolid utilization advantage over itsNorth American peers. Against international peers our32  PROSPECTS FOR ONTARIO’S PROSPERITy
  • ontario still has a significant intensity gapversus our north american peerswhy intensity matters how ontario has performed By contrast, Ontarians work moreIntensity is the final step in measuring Ontario workers are on the job much hours than their international peers.work effort, capturing how many hours less than their North American peers, While we do not have access to theworkers are on the job. It is affected by and this gap has widened slightly even same level of detail in hours worked todifferent factors that often work in during the current US economic turmoil analyze these differences, previousopposite directions and can be difficult (Exhibit 13). On average, Ontario research points to higher regulatoryto interpret. When workers want more workers work 160 fewer hours or strictures and cultural differencesleisure – choosing shorter work days or 4.3 weeks less than their counterparts to explain the greater preference forlonger vacations – intensity measures in US peer states. The main source of leisure, especially in Europe.peoples’ preferences. In most devel­ this intensity gap is in vacations; ouroped economies, workers opt for more workers, especially those earning outlook for 2020leisure, and the hours they work decline higher incomes, have a higher propen­ It is difficult to identify a desired pathover time. That is not an economic sity to take vacations lasting at least a for intensity. We certainly do notproblem needing a solution. week, and this accounts for 54 percent propose that we close our prosperity However, lower intensity may be the of the intensity gap. The other major gap by reducing our vacations andresult of the economy creating more part of our intensity gap is our higher working longer days. But we do think itpart­time jobs than full­time jobs, incidence of part­time work, particu­ is important for our economic develop­and many workers are not able to larly involuntary part­time. More of our ment to provide full­time work to allwork as many hours as they wish. Or part­timers want to work full­time, but who want it.government regulation may have cannot find full­time jobs. Finally, aunnecessarily restricted hours worked smaller percentage of our workersby individuals wanting to put in many report working long work weeks – morework hours. than 50 hours on average. Exhibit 13 Ontario workers are on the job less than North American peers, but more than their international peers Intensity 2001–2010 Hours/worker/year 1,900 North American peer median 1,800 1,700 Ontario 1,600 International peer median 1,500 2001 2004 2007 2010 Note: Because of limited data on hours worked national figures are used for Lombardia, New South Wales, Vlaams Gewest, South East, and Rhône-Alpes. Source: Institute for Competitiveness & Prosperity analysis based on data from Statistics Canada; Bureau of Labor Statistics; US Census Bureau; Australian Bureau of Statistics; National Bank of Belgium; Statistics Belgium; Institut national de la statistique et des études économiques; Statistische Ämter Des Bundes Und Der Länder; LIstituto Nazionale di Statistica; Instituto Nacional de Estadística; UK Office for National Statistics; Statistics Bureau of Japan; SNA Statistics National Accounts of Japan; OECD; IMF; Eurostat. WORk EFFORT AND PRODUCTIVITy 33
  • Productivity continues to be our main prosperity challenge Exhibit 14 Ontario has a persistent and significant productivity gap Productivity 2001–2010 GDP/hours worked (C$ 2010) $70 North American peer median 65 International peer median 60 55 Ontario 50 2001 2004 2007 2010 Source: Institute for Competitiveness & Prosperity analysis based on data from Statistics Canada; Ontario Ministry of Finance; Banque de données des statistiques officielles sur le Québec; Bureau of Labor Statistics; US Census Bureau; Australian Bureau of Statistics; National Bank of Belgium; Statistics Belgium; Institut national de la statistique et des études économiques; Statistische Ämter Des Bundes Und Der Länder; LIstituto Nazionale di Statistica; Instituto Nacional de Estadística; UK Office for National Statistics; Statistics Bureau of Japan; SNAwhy productivity matters 68 percent in developed economies; outlook for 2020Productivity measures the value only a finite percentage of adults work, Since our work effort will likely declineadded in our economy by the number certainly not more than 100 percent; in the coming years because of changingof hours worked to result in a GDP and there are only 24 hours in a day. demographics and other factors, weper hour worked. While expressed in But productivity has no upper limit. It is need to improve our productivity. If weterms of labour hours, productivity is the key driver of prosperity growth. assume that Ontario maintains its worka summary measure of the strength Productivity is important because it effort advantage over our Northof our business strategies in creat­ is synonymous with innovation. Produc­ American and international peers toing innovative products and services, tivity growth is the result of improved 2020 and that we need faster produc­the capabilities of our workers in products and services or processes tivity growth to close the prosperityapplying skills and knowledge in the which are innovations. gap, then we need productivity to growworkplace, the quality of our infra­ at an annual rate of 2.1 percent fromstructure, and other factors. how ontario has performed 2011 to 2020. This is a tall order as Nobel laureate, Paul krugman Since our first annual report we have our annual growth rate since 2001 hasconcluded that, “Productivity isn’t identified productivity as the most been 0.2 percent. This will requireeverything, but in the long run it is important economic issue facing ongoing improvement in our humanalmost everything. A country’s ability Ontario. We are laggards versus our capital through more education,to improve its standard of living over North American and international coun­ innovative strategies from our busi­time depends almost entirely on its terparts and our relative performance nesses, including more investment inability to raise its output per has not improved over the decade R&D and technology, and ongoingworker.” 25 The factors that drive work (Exhibit 14). improvements in our tax system – all ofeffort – profile, employment, and which we discuss in this Report.intensity – have limits. The percent­age of the population that is of 25 Paul krugman (1997) The Age of Diminishing Expectations, Third Edition, Cambridge: Theworking age doesn’t get too far past MIT Press.34  PROSPECTS FOR ONTARIO’S PROSPERITy
  • human caPitalOur innovation performance dependsheavily on our people and their capabilitiesontArio will bE globAlly compEtitivE to thE ExtEnt thAt its peoplehave sophisticated skills that enable them to be innovative workers, managers,and customers. These skills and capabilities are often referred to as “humancapital.” Like physical capital, human capital requires investments – typi-cally in education and in work experience – and provides a return throughhigher productivity and wages. Increasing the development of these skills – orincreasing our human capital – will help the province close its prosperity gap.It will also reduce the incidence of poverty. As we review progress over the lastdecade, we see that:• We are making progress on raising the number of people with degrees – a critical factor for competing on the basis of innovation• The incidence of individuals without a high school diploma is falling• The costs of being under educated, such as higher unemployment and other poverty measures, are increasing – especially in the current economic turmoil• The educational attainment of our management cadre is increasing, but only slowly; we still trail our US counterparts significantly• We still have too many Ontarians living in poverty through lack of education and higher unemployment, but at least the proportion is not increasing.Much of the responsibility for increasing our level of human capitallies with governments and their investments. But individuals areresponsible for enhancing their lifelong skills, and businesses arean important participant in the improvement process.36  PROSPECTS FOR ONTARIO’S PROSPERITy
  • ontario has awarded more post secondary degrees over the decade Exhibit 15 Ontario has made good progress in awarding Exhibit 16 Ontario continues to trail in awarding bachelor’s degrees, but still trails business degrees at the master’s level University degrees awarded University degrees awarded per 1,000 population by level per 1,000 population by field 2001–2008 2001–2008 Degrees/1,000 Degrees/1,000 9 9 Total Total 8 degrees 8 degrees US awarded 7 US awarded 7 Ontario Ontario Bachelors 6 6 and first 5 Other 5 professional 4 4 3 3 2 US Business ON Science 2 1 US Science Masters ON Business 1 0 PhD 2001 2004 2007 2008 0 2001 2004 2007 2008 Note: Ontario uses calendar year and the US uses academic year. Source: Institute for Competitiveness & Prosperity analysis based on data Note: Ontario uses calendar year and the US uses academic year. from the Association of Universities and Colleges of Canada and US Source: Institute for Competitiveness & Prosperity analysis based on data from Department of Education, Institute of Education Sciences, National Centre for Statistics Canada and US Census Bureau. Education Statistics.why degree first professional degree level ­ 6.4 outlook for 2020attainment matters degrees per 1,000 population in Our young people have made excellentOver the years, our work has shown Ontario versus 5.6 in the United States progress in achieving universitythat post secondary education is an (Exhibit 15). However, our gap at the degrees, and this will translate intoimportant element of our innovation, master’s level has widened, with the US prosperity gains in the future forproductivity, and prosperity progress rate about doubling our annual rate per Ontario through better educated– for individuals, firms, and jurisdictions. capita. At the PhD level, we continue to workers, managers, entrepreneurs, andMore education directly correlates with trail, but the number of degrees customers. We should continue tohigher lifetime earnings and lower awarded at this level is very low. invest in post secondary education andunemployment. International research In sum, we have almost eliminated redouble our efforts at reducing barriersby the OECD shows a positive and the gap in post secondary degrees for lower income families – to achieve ansignificant relationship between years awarded over the last decade. In fact, even bigger advantage at the bachelor’sof schooling and per capita growth in in 2007 with the double cohort we level. We also need to convince more ofoutput. A more educated management had more graduates per capita than these graduates to continue in graduatecadre is associated with stronger the United States. That’s the good studies and ensure adequate funding tomanagement capabilities. And there is news. The bad news is that the support this. Increased investments ina strong correlation between labour widening master’s gap is a hindrance, graduate education through Reachingforce quality and per capita economic because master’s degree holders Higher will help achieve this.growth rates. To the extent we have a earn an 11 percent premium over University administrators need tohighly educated workforce, Ontario will bachelor’s degree holders – indicating respond to the desire of incoming studentsthrive as globalization advances. that the degree contributes more to to pursue business studies. Our our productivity and innovation previous research has shown that entryhow ontario has performed performance.26 standards in Ontario universities are higherIn our First Annual Report, we noted Reviewing the results by field of for business undergraduate degreesthat Ontario produced slightly more study, we see that business continues than for the sciences and humanities.27bachelor’s degrees annually than the to be the source of Ontario’s gap versusUnited States. But, at the master’s level, the United States. (Exhibit 16) Given 26 Institute for Competitiveness & Prosperity, Fifth Annual Report, Agenda for our prosperity,our graduation rate trailed considerably. that our business managers are less November 2006, p. 36.Since then, Ontario has opened up a 15 well educated irrespective of 27 Institute for Competitiveness & Prosperity, Canada’s Systematic Under Investment in the Education ofpercent lead in the rate at which we field of study, this gap is likely limiting Managers, January 2011, slide 5, available at http://www.competeprosper.ca/images/uploads/graduate students at the bachelor’s and our prosperity. manager_Education_rlm_240111.pdf HUMAN CAPITAL 37
  • fewer ontarians are high school dropouts Exhibit 17 Fewer Ontarians lack a high school diploma Population age 25-64 without a high school diploma, Working age population without a high school diploma Ontario and United States Ontario, 2001–2010 2001–2010 000s 11% 450 Age 25 to 44 400 10 350 Age 55 to 64 9 300 8 Ontario 250 Age 45 to 54 7 200 US 6 150 2001 2004 2007 2010 2001 2004 2007 2010 Source: Institute for Competitiveness & Prosperity analysis based on data from Source: Institute for Competitiveness & Prosperity analysis based on data from Statistics Canada and US Census Bureau. Statistics Canada.why high school intellectual skills and this will only outlook for 2020diplomas matter intensify. A high school diploma is not In 2006 the Ontario governmentIn the era of globalization, when an adequate education; but it is a first required our youth to stay in schooldeveloping economies are moving step to gaining other valuable skills. until age 18. Measures like this plustoward competing on the basis of other approaches that keep our youthinnovation, education becomes more how ontario has performed in school – and that encourage them toimportant. So those Ontarians Lack of a high school diploma has been reach higher – will help improve ourwithout a base level of education are a real area of weakness in human human capital and therefore ourincreasingly vulnerable. Entering the capital for the province – and an innovation and prosperity. Morework force without a high school important factor in the $1,200 important, progress on this frontdiploma is a ticket to poverty. per capita cost to our prosperity. fights poverty. The Institute’s research has shown Compared to our counterparts inthat adults without a high school the United States, more of our popula­ 28 Task Force on Competitiveness, Productivity and Economic Progress, Ninth Annual Report, Today’sdiploma have a 12 percent chance of tion lacks a high school diploma, innovation, tomorrow’s prosperity, November 2010, pp. 23­25.earning an income below the Low although this difference is shrinkingIncome Cut­Off. Combined with other (Exhibit 17).factors associated with poverty Today, fewer working age Ontarians– being a recent immigrant, a single lack a high school diploma. This isparent, an Aboriginal person, or an partly because older workers who areunattached individual between the less likely to have a high school diplomaages of 45 and 64 – lack of a high are retiring. But it’s also because moreschool diploma increases the odds of of our younger people are now earningliving in poverty dramatically.28 a high school diploma. So we areElsewhere in this Annual Report, gradually upgrading our human capital.we show how those without highschool diplomas are much more likelyto be unemployed, especially in thiscurrent downturn. Our modern economy values38  PROSPECTS FOR ONTARIO’S PROSPERITy
  • unemployment is still most severe among those with least educationwhy unemployment matters manufacturing industries were most innovative workers will only increase inIncreasing our human capital is an vulnerable to the sector’s decline which the coming years. Jobs with require­important part of achieving our 2020 occurred largely as a result of the ments for higher analytical and commu­Prosperity Agenda. Researchers and strengthened Canadian dollar.32 nications intelligence simply pay more.academics have various ways of Globalization is raising both the Jobs with higher physical skills require­measuring human capital. The highest premium for higher educational attain­ ments pay less. We need to stay on thelevel of education achieved is one. ment and the earnings deficit for lower path, in fact accelerate our trajectory,Others include years of work experi­ educational attainment. that provides educational opportunitiesence or achievement on standardized for young Ontarians to continue theirtests like the International Adult how ontario has performed education – as far as their capabilitiesLiteracy Survey (IALS). None is perfect, Ontarians have increased their educa­ will take them. For our older, less skilledbut educational attainment is generally tional attainment over the past decade. workers, we need to identify creativeseen as an acceptable proxy. This is clearly a good thing, because the solutions, like wage insurance,33 to deal Regardless of acceptance of this impact of more education has become with long­term unemployment and tomeasure, it is clear that higher educa­ more pronounced in the past decade upgrade current retraining approachestion brings societal and personal (Exhibit 18) – especially in the current that are ineffective.34 (See Considerbenefits. We have seen in our own work economic downturn. In 2010, unemploy­ wage insurance to help older displacedthe impact on earnings from educa­ ment rates for those without a high workers.)tional attainment.29 In research done school diploma averaged 11.5 percent,through collaboration with the Centre compared with 7.0 percent for those 29 Report on Canada 2011, Canada’s innovation imperative, pp. 34­36; and Annual Report 8,for the Study of Living Standards, the with a bachelor’s degree and 5.0 percent Navigating through the recovery, pp. 42­43.Institute found that greater educational for those with advanced degrees. 30 Centre for the Study of Living Standards, Does Money Matter? Determining the Happiness ofattainment increased factors that While the current downturn has Canadians, November 2010, updated February 2011, available online: http://www.csls.ca/improved subjective well being or raised unemployment rates for all reports/csls2010-09.pdfpersonal happiness.30 We have seen the groups defined by education level, the 31 Institute for Competitiveness & Prosperity, Working Paper 10, Prosperity, inequality, andimpact of low educational attainment negative impact for high school poverty, September 2007, pp. 31­33.on the risk of poverty.31 dropouts is now more dramatic than 32 Institute for Competitiveness & Prosperity, Working Paper 14, Trade, innovation, and Ontario’s businesses have to compete earlier in the decade. prosperity, September 2010, pp. 39­40.globally on the basis of innovation and 33 For further reading, please refer to Exhibit B in the Report on Canada 2011, Canada’s innovationcreativity. These were important factors outlook for 2020 imperative.in determining which of our The demand premium for creative and 34 Report on Canada 2011, Canada’s innovation imperative, p. 59. Exhibit 18 Unemployment rates are higher for those with less education Unemployment rate by educational attainment (25+) Ontario, 2001–2010 Unemployment rate 13% Less than 11 high school 9 High school 7 Some post secondary Bachelors 5 Advanced 3 2001 2004 2007 2010 Source: Institute for Competitiveness & Prosperity analysis based on data from Statistics Canada, CANSIM Table 282-0004. HUMAN CAPITAL 39
  • consider wage insurance tohelp older displaced workersDisplaced workers face enormous difficulties in attempting tore­enter the workforce.A recent study by University of Ottawa economists displaced workers. When workers laid off from a long tenureRoss Finnie and David Gray shows that the older the laid job take on a lower paying job, wage insurance could coveroff worker, the greater the subsequent earnings loss half the earnings difference for a period of about two years.(Exhibit b). Workers older than 50 face much more severe The benefit could be capped at $10,000 annuallychallenges than their younger counterparts. to ensure targeting at lower­ and middle­income workers. Unfortunately, there is no sure plan to help these displaced The coverage rate and period and the benefit cap could beworkers. Retraining is the panacea most often promoted. adjusted up or down.But definitive results are hard to come by. Wage insurance could be an effective way of helping older Wage insurance could be a useful approach to supplement laid off workers get back on track more quickly. But it is byexisting programs for workers transitioning to lower paid no means a proven policy. We encourage governments towork – which unfortunately may be inevitable for older investigate it further. Exhibit B Older workers are most severely affected by layoffs Average change in earnings for displaced workers By age of worker 1996–2002 % change in earnings 10% 35-39 0 40-44 45-49 -10 50-54 -20 -30 55-59 60-64 -40 -50 Years after layoff 1 2 3 4 5 Source: Ross Finnie and David Gray, “Labour-Force Participation of Older Displaced Workers in Canada,” IRPP Study, No. 15, February 2011, Table 5.40 PROSPECTS FOR ONTARIO’S PROSPERITy
  • managers’ educational gap has closed slightly Exhibit 19 Ontario’s managerial education gap has closed slightly Managers with university degree (25+) 2001–2010 % of managers 60 United States % with 50 university degree Ontario 40 % with bachelors 30 degree only % with an 20 advanced degree 10 0 2001 2004 2007 2010 Source: Institute for Competitiveness & Prosperity analysis based on data from Statistics Canada and Bureau of Labor Statistics, Current Population Survey.why managers’ points to the importance of manage­ slightly over the last decade (Exhibiteducation matters ment excellence. Advances in 19). The percentage of our managersManagement capability is an important management techniques, such as with a university degree increased fromelement in improving our innovation and just­in­time inventory or management 37 in 2000 to 42 in 2010. In theproductivity performance. Strong by objectives, have propelled produc­ United States, this percentage rosemanagement is important for sizing up tivity growth in the United States.35 And from 51 percent to 55 percent. So thecompetitive challenges and threats, Canada’s successful tech startups gap has fallen by one percentage point,assessing consumer behaviour for found that one of the biggest hurdles from 14 to 13 percentage points.business opportunities, putting in place they faced in competing with their USthe necessary resources and capabili­ competitors was finding capable outlook for 2020ties, and building skills and talents in the managers.36 We are moving in the right direction,organization. Our framework for The Institute also measured the but at glacial speed. This is an impor­improving innovation comprises both quality of Canadian management in tant deficit we have with our USsupport for and pressure on business, manufacturing and retailing compared counterparts. Our businesses need toand managers are critical in both these to that of their counterparts in other look critically at their human resourceareas. In support of innovation, effective countries. While Canada’s perfomance strategies in their management ranks.managers create the conditions for was solid, the research showed Our firms and our province cannotachieving the innovative initiatives they how the quality of management expect to realize their full innovationenvision for their organizations. Capable improved as the percentage of an potential without a highly capablemanagers also create pressure for organization’s management team had management cadre.innovation by insisting that their university degrees.businesses and suppliers are increas­ 35 Institute for Competitiveness & Prosperity, Working Paper 12, Management matters,ingly sophisticated and by making their how ontario performs March 2009, pp. 15­16.firms’ rivals uncomfortable through The lower educational attainment 36 The Strategic Counsel, Assessing the Experience of Successful Innovative Firms in Ontario,aggressive competition. Capable of our managers is a competitive September 2004, pp. 10, a report sponsored bymanagers are effective partners to disadvantage for Ontario. As we have the Institute for Competitiveness & Prosperity available at http://www.competeprosper.ca/scientists and engineers, helping to shown in the past, a lower percentage images/uploads/innovationinterviewstudyrep.pdffocus their efforts on business strate­ of our managers have university 37 Institute for Competitiveness & Prosperity, Canada’s Systematic Under Investment in thegies and to see opportunities in new education and a higher percentage only Education of Managers, January 2011, slide 7, available at http://www.competeprosper.ca/unanticipated discoveries. have a high school diploma.37 We have images/uploads/manager_Education_rlm_ Research by the Institute and others closed the educational attainment gap 240111.pdf SECTION 41
  • ontario’s poverty rate is unchangedwhy lico matters how ontario has performed they need to strengthen their attach­The Low Income Cut­Off, or LICO, is a The percentage of Ontarians below ment to the labour force and tomeasure developed by Statistics LICO has held fairly steady over the enhance their skills through education.Canada. It defines the income level at last decade (Exhibit 20). Across all fourwhich individuals or families spend measures, the percentage increased outlook for 202020 percentage points or more of their very gradually during the first half of If we can address the povertyincome on food, shelter, and clothing the decade, but was below the rates challenges for specific groups, we willthan the average family of similar size. experienced during most of the move forward on our 2020 ProsperityWhile Statistics Canada does not 1990s. The percentage earning Agenda. Reducing poverty is the resultidentify LICO (or any other measure) as below LICO fell gradually from 2004 of drawing on more Ontarians ina cut­off for poverty, we think it a useful to 2007. As the economic turmoil contributing to our GDP. To do this, webenchmark for determining began in 2007, the percentage of need to enhance educational attain­the exclusion of Ontarians from Ontarians living below LICO turned ment for our citizens by increasingparticipating in and contributing to up. Still, the rates did not increase to access to post secondary education,wealth creation in our economy. the same extent as they did in the supplementing the earnings of lower LICO can be measured across 1990s and during the downturn of the skilled workers by improving programsindividuals and families38 and on a early 1980s. like the Working Income Tax Benefit,before­tax and after­tax basis.39 Poverty is not distributed evenly and finding effective ways to retrainBecause of the progressivity of our tax across our population. Specific groups workers who lose their jobs.system, the percentage of individuals are much more likely to have incomesand families earning below LICO, after below LICO – high school dropouts, 38 Unattached individuals are also counted as families.tax, is lower than the percentage recent immigrants, single parents, 39 Transfer payments are counted as income in bothbefore tax. persons with disabilities, Aboriginal before­ and after­tax measures. people, and unattached individuals, aged 45–64. To increase their incomes Exhibit 20 The incidence of Ontarians living in poverty has not changed much Low income incidence in Ontario 2001–2009 % under Low Income Cut-Off 20% Families (before tax) 15 Individuals (before tax) Families (after tax) 10 Individuals (after tax) 5 2001 2004 2007 2009 Note: LICO is defined as “the income below which a family is likely to spend 20 percentage points more of its income on food, shelter and clothing than the average family.” Percent of individuals below LICO is determined by whether an individual belongs to an economic family below LICO and includes unattached individuals. Source: Institute for Competitiveness & Prosperity analysis based on data from Statistics Canada, CANSIM Table 202-0804 and Income Trends in Canada, 1976 to 2007.42  PROSPECTS FOR ONTARIO’S PROSPERITy
  • investmentsInvestments are the lifeblood of innovation and prosperity;Ontario businesses and governments need to invest moreprospErity is drivEn by productivity, and productivity is driven by inno-vation. Much innovation is the result of creative insights and well thoughtthrough strategies. But much innovation is enabled by investment in humanand physical capital. In our past reports, we have found Ontario businesses and governmentswanting in their investment in our innovation capabilities. Our look back overthe decade indicates lagging investment on several fronts:• Our public expenditures have tilted toward the consumption of current prosperity, such as for health care, and away from investments in future prosperity, such as education• Businesses in Ontario invest less in sophisticated technology than their North American counterparts• Our growing investments in public R&D have not translated into growth in business R&D• Ontario’s lagging patents signal trailing innovation• Our previously high taxation of new business investment has contributed to this lower investment, but we now have a tax advantage internationally. Our governments and businesses face tough spending decisions in thesevolatile economic times. As they assess tradeoffs, we encourage them to placea priority on investments in our innovation capability to realize our prosperitypotential in the coming decade.44  CHAPTER PROSPECTS FOR ONTARIO’S PROSPERITy
  • Public expenditures need a better balance of spending onconsumption and investment Exhibit 21 In Ontario, public investment in education trails health care spending significantly Public expenditure per capita on health and education Ontario and United States Expenditure 1992–2009 per capita (C$ 2009) $4,000 US health 3,500 US education 3,000 Ontario health 2,500 Ontario education 2,000 1,500 1992 1995 1998 2001 2004 2007 2009 Notes: US health spending includes workers compensation, medical benefit outlays and excludes administrative and other costs; Ontario health spending includes all workers compensation. Values deflated using GDP deflators. US dollars converted to Canadian dollars at 2009 PPP. Source: Institute for Competitiveness & Prosperity analysis based on data from Statistics Canada, Consolidated Government Revenue and Expenditures (CANSIM Table 385-0001); US Census Bureau, State and Local Government Finances; Office of Management and Budget, Historical Tables; National Academy of Social Insurance, Workers Compensation: Benefits, Coverage, and Costs, 2008.why balancing health care than on education. This gap cannot forsake investments for thecare and education widened considerably as health care long term as they tackle deficits.spending matters spending per capita increased at anBroadly speaking, public expenditures annual trend line real rate of 4.7 outlook for 2020can be broken into two fundamental percent between 1998 and 2009, It is encouraging to note that publicbuckets: investment in building future while education spending increased spending on education in Ontario hasprosperity, and consumption of only 2.4 percent annually. Last year, turned up in recent years, led by thecurrent prosperity. Education is a per capita public spending on health investments of the Ontario governmentprime example of investing in future care out paced spending on education in post secondary education.prosperity, while most health care by 29 percent; a decade ago, spending While constant dollar per capitaspending is consumption of current was about the same for both. public investments in educationprosperity. We do not conclude that Contrast Canada’s response to the increased slightly, at a rate of 0.8education is preferable to health 1990–93 economic downturn with percent annually between 1997 andcare spending. Both are critical that of the United States, which 2003, this annual growth rateresponsibilities of government. But it admittedly entered that recession in increased to 3.6 percent betweenis instructive to assess patterns of better fiscal shape than Canada. US 2003 and 2009. In the United States,expenditure to determine if we are governments did not need to engage in the annual growth in constant dollarshifting the balance (Exhibit 21). the dramatic deficit fighting seen in public expenditure on education was Canada. State systems, such as 1.7 percent between 2003 and 2008.how ontario has performed education, therefore did not experience Still, much remains to be done, as theAs federal and provincial governments the kind of shock that Canadian gap to be closed on education spendingat both levels tackled deficits in the education experienced. Over the same remains considerable – at $600 per1990s, they cut real per capita period, health care spending by capita in 2008. As federal and provin­spending on education, an investment, governments in the United States did cial governments turn their attention toat a much faster rate than that on grow faster than for education. the massive deficits they have gener­health care spending, which is con­ We do not point to the US as a paragon ated in the past two years, they need tosumption. By 1998, governments in of fiscal intelligence and responsibility; ensure that spending cuts are madeOntario were spending more on health our only point is that governments appropriately with innovation in mind. INVESTMENTS 45
  • our businesses continue to lag in technology investments Exhibit 22 Our businesses lag their US counterparts in productivity enhancing investments Private sector machinery, equipment, and software investment 2001–2010 + = Annual All other machinery and Information and communications Total investment in machinery, investment equipment technology equipment, and software per employed person (Current C$ ) $12,000 US 9,000 US 6,000 Ontario US 3,000 Ontario Ontario 0 2001 2004 2007 2010 2001 2004 2007 2010 2001 2004 2007 2010 Ontario/US 78% 69% 63% 67% 72% 68% investment per worker Annual investment per employed Computer hardware Telecom equipment Software person (Current C$ ) $3,000 US 2,000 Ontario 1,000 US US Ontario Ontario 0 2001 2004 2007 2010 2001 2004 2007 2010 2001 2004 2007 2010 Ontario/US 86% 90% 65% 62% 51% 60% investment per worker Note: US dollars converted to Canadian dollars using PPP for M&E. The 2010 PPP for M&E is estimated based on CAD/USD exchange rates. Source: Institute for Competitiveness & Prosperity analysis based on data from Statistics Canada (special tabulations); Labour Force Survey (CANSIM Table 282-0002); US Department of Commerce, Bureau of Economic Analysis; US Bureau of Labor Statistics, Current Population Survey; CSLS Database of Information and Communication Technology (ICT) Investment and Capital Stock Trends: Canada vs United States, available online: http://www.csls.ca/data/ict.asp46  PROSPECTS FOR ONTARIO’S PROSPERITy
  • Businesses need strategiesbased on innovation; technologyinvestments provide supportfor these strategieswhy business consistent over the decade. In 2010, outlook for 2020investment matters the Ontario­US gap in ICT investment Ontario’s significant tax reform willInvestments by businesses in machin­ per worker was $1,375; Ontario eliminate the tax disadvantage. Andery, equipment, and software make businesses invested at the rate of opening up trade with Europe andtheir workers more productive. Such 67 cents for every dollar invested by developing economies will increase theinvestments that are made are typically their US counterparts. support and pressure for investment.allocated to Information and Communi­ Further exploration of ICT expendi­ Greater competitive pressure and acations Technology (ICT) and to all tures reveals that the major source of more capable management cadre willother traditional categories, such as our investment gap is in the area of help improve our performance in thistransportation equipment and factory software, with a smaller gap in com­ important area.equipment. ICT accounts for about 40 puter hardware and telecommunica­percent of investment in machinery, tions equipment. It appears that 40 Roger Martin and James Milway, Enhancing the Productivity of Small and Medium Enterprisesequipment, and software. Ontario businesses have a higher through Greater Adoption of Information and Communication Technology, Information and Investment in ICT enhances produc­ propensity to purchase hardware, Communication Technology Council, Ottawa,tivity at three levels.40 At the most which tends more to be off­the­shelf, March 2007, available online: http://www. ictc-ctic.ca/uploadedFiles/labour_market_basic level, equipping staff with than to acquire software, which can be intelligence/trends/other_trends/report_computers and software increases firm customized to specific business items/12-Enhancing%20the%20productivity %20of%20smEs.pdfand national productivity. At the processes. This is one more example of 41 State­level information is unavailable.second level, connecting computers in our businesses attenuating theirnetworks and drawing on more investment profile. We invest in thetechnologies can drive productivity basics, but lag in the more sophisti­even higher. But the most significant cated elements that are part of ourbenefit of ICT adoption can be that it innovative strategies.enables profound transformation of We conclude that the lack of invest­businesses through changes in ment in ICT throughout the decade canbusiness processes or organizational be attributed to factors identified indesign or both. research in other areas – lack of competitive pressure to spur Canadianhow ontario has performed businesses to adopt technology, lessOn a per worker basis, US businesses adequate management capabilities toout invest Ontario businesses in discern the benefits of technology andmachinery and equipment (Exhibit 22). to capitalize on them, and higher For traditional machinery and taxation on business investment.equipment, the gap between Ontarioand its US counterparts41 has tradition­ally been lower but has been wideningover the past decade. In 2010, forevery dollar invested by US businessesin traditional machinery and equipmentper worker, Ontario businesses invest69 cents. In the more sophisticated area ofmachinery and equipment, ICT, our lagis about the same and has been INVESTMENTS 47
  • Business r&d investment has lagged peers’ spendingwhy r&d matters (Exhibit 23). Clearly, our increased high taxes on new business investmentR&D comprises basic research, applied public expenditure for R&D has not led – the kind that would be required toresearch, and experimental development. to increases in R&D by business. benefit from R&D success. ThisIt is distinguished from other pursuits, This gap had been closing during the mismatch held back business R&D;44such as design, market research, or dot­com boom, led by Nortel, but since with the significant improvement inquality control, in that it is ultimately then, it has opened up again. The demise our tax policy, we should see moreconcerned with the production of original of Nortel does not account for all of the business R&D in the future.knowledge, processes, or products. 42 increase in the gap in business R&D. In The recently released Expert Panel Economists have gathered 2001, Nortel’s Ontario R&D accounted report of the “Review of Federalsignificant evidence of the positive for 1.1 percent of GDP and all other Support to Research and Development”relationship between R&D and produc­ Ontario businesses accounted for 0.6 recommends a sharper focus on busi­tivity and have produced substantial percent – for a total of 1.7 percent. ness innovation in our national policiesproof that R&D investment is a key Nortel’s importance to Ontario’s R&D to support R&D, simplification of thedriver of long­term prosperity. In declined through the decade. By 2007, Scientific Research and Explorationaddition, R&D investment has been when Nortel’s R&D was 0.3 percent of Development tax credit, and greatershown to have a positive relationship GDP, Ontario’s other businesses use of government procurement towith patenting, another measure often investment in R&D had increased to 1.1 drive business innovation. We encour­used as a proxy for innovative activity.43 percent of GDP. So, Ontario’s businesses age stakeholders in Ontario’s prosper­ have picked up just over half of the ity to engage in deliberation and debatehow ontario has performed R&D spending lost as Nortel declined. over the panel’s recommendations.As a percentage of GDP, Ontario’s R&Dinvestment lags our peers’ spending. A outlook for 2020 42 OECD, Frascati Manual, 1992, p. 29. 43 Zvi Griliches, Ariel Pakes and Bronwyn Hall,closer examination of Ontario’s R&D One of the obstacles to business R&D The Value of Patents as Indicators of Inventiveinvestment indicates that our gap is in has been the high marginal effective Activity, NBER Working Paper No. 2083, 1988, p. 3.the area of private sector business tax rates on business investment. 44 kenneth J. Mckenzie (2006), “Giving with OneR&D, not in publicly funded higher Despite the generous tax treatment for Hand, Taking Away with the Other,” C.D. Howe Institute, Commentary, No. 240.education and government R&D R&D in Canada, businesses faced very Exhibit 23 Ontario’s businesses trail in R&D investments R&D spending as percent of GDP 2001–2008 % of GDP Business Higher education Government 2.5% 2.0 North American peer median 1.5 Ontario 1.0 Ontario 0.5 North American peer median Ontario North American peer median 0 2001 2004 2007 2008 2001 2004 2007 2008 2001 2004 2007 2008 Ontario Rank 16th 9th 11th 2nd 2nd 2nd 3rd 4th 2nd Peer Leader Michigan Michigan Massachusetts Québec Québec Québec Virginia Virginia Virginia Source: Institute for Competitiveness & Prosperity analysis using data from Statistics Canada, CANSIM; National Science Foundation, Division of Science Resources Statistics; and US Bureau of Economic Analysis.48  PROSPECTS FOR ONTARIO’S PROSPERITy
  • ontario’s lagging patents signal trailing innovation Exhibit 24 Ontario businesses lag in patent creation Patents per 10,000 employees 2001–2010 7 North American peer median 6 5 4 Ontario 3 2 1 0 2001 2004 2007 2010 Ontario Rank 15th 15th 13th 13th Peer Leader Massachusetts (11.5) California (11.6) California (11.3) California (16.9) Source: Institute for Competitiveness & Prosperity analysis based on data from Martin Prosperity Institute analysis of US Patent and Trademark Office results. why patents matter patentability are more stringent than outlook for 2020A key measure of innovative capac­ those in most European countries.” 48 By itself, the lower patent output by ourity and processes is patenting. While In addition, because of its size and businesses is not proof that Ontario isit is important to note that not all inno­ economic strength, the US market an innovation laggard and an increasevative activity is captured by patents represents a significant potential will not by itself deliver a prosperity– for example, in management process market for a typical patent. surge. But, coupled with growth in R&Dimprovements or in software – many investment, technology spending, andacademics who study innovation agree how ontario has performed more manager education, more patentsthat patenting is a solid measure of a Ontarians are simply not innovating would be an important signal that ournation’s or region’s innovative output.45 at the same pace as their competitors. businesses are competing more on the R&D by businesses and patent Patent data indicate that Ontario basis of innovation and that we shouldoutput are closely linked. Generally, trails the median output of the peer see productivity, wages, and prosperitymore dollars spent by businesses on states, though the gap has narrowed grow at an above average rate.R&D lead to more patents.46 (Exhibit 24). Ontario has consistently A patent grants exclusive commer­ ranked near the bottom of the peercial use of a newly invented device. states in patent output, and has been 45 See Michael Porter, “The Economic PerformanceAccording to Trajtenberg, “For a patent well below the peer leader over the of Regions,” Regional Studies, Vol. 37, No. 6–7, 2003, p. 551 and note 9, p. 572 for a review ofto be granted, the innovation must be past decade. In other work done by the the academic work in using patents as a measurenon­trivial, meaning that it would not Institute, we found that, in all but six of innovative capacity. 46 Report on Canada 2011, Canada’s innovationappear obvious to a skilled practitioner clustered industries, Ontario trails the imperative, p. 40.of the relevant technology, and it must peer states in patent creation. 47 Manuel Trajtenberg, “Is Canada Missing the ‘Technology Boat’? Evidence from Patent Data,”be useful, meaning that it has potential paper presented at Centre for the Study of Livingcommercial value.” 47 Standards – Industry Canada Conference on Canada in the 21st Century: A Time for Vision, US patent data are a good indica­ September 1999, p. 5.tor for Canadians because “patents are 48 Ibid., p. 4.often sought first and foremost in theUnited States, where the standards for INVESTMENTS 49
  • ontario’s taxes on new business investment are now among the lowest Exhibit 25 Ontario is now a low tax jurisdiction for business investments Marginal effective tax rate on capital investment 2005–2010 METR 45% Ontario 40 Canada United States 35 France Japan UK 30 Italy Australia 25 Spain Germany 20 15 Projected 2005 2006 2007 2008 2009 2010 2013 Source: Institute for Competitiveness & Prosperity analysis based on data from Duanjie Chen and Jack Mintz, "Canadas 2010 Tax Competitiveness Ranking" SPP Briefing Papers Vol. 4, Iss. 2, February 2011; Duanjie Chen and Jack Mintz, "Federal-Provincial Business Tax Reforms" SPP Briefing Papers Vol. 4, Iss. 1, January 2011; Duanjie Chen and Jack Mintz, "Business Tax Reform: More Progress Needed - Supplementary Information," C.D. Howe Institute e-brief, June 2006.why mEtr matters assets once in place, and sales taxes gone. A significant improvement alsoAs we have seen, our businesses invest paid on the purchases for the came about when Ontario’s govern­less per worker than their counterparts investment. METR is total taxes as a ment replaced the retail sales tax within the peer states. This matters percentage of the pre tax income a value added tax, which means thatbecause our workers and businesses generated by the marginal dollar of new businesses no longer pay tax on goodscould create more value if they were business investment. purchased as part of their investments.supported by the most advanced In 2010, Ontario’s METR on newsoftware and equipment. In turn, this how ontario has performed business investment was lower thanwould lead to more competitive Until recently, Ontario has been a that in all the countries where our peerbusinesses and higher wages. high tax jurisdiction as measured by regions are located. And our rates will Much research has been done to METR. Based on combined federal go lower still.show that new business investments and provincial rates, corporateincrease when taxes on them fall.49 income tax rates were relatively high. outlook for 2020While recent research by CAW econo­ Capital taxes were imposed on our Reductions in our METR on businessmist Jim Stanford concludes that tax businesses’ assets. A provincial sales investment have been one of the mostrates have had no direct statistically tax was collected on many items promising developments over the lastsignificant impact on business invest­ purchased by businesses when they decade. According to internationalment, it is fair to say that the consen­ made investments. In 2005, the METR tax expert, Jack Mintz, thesesus among economists is that lowering on business investment in Ontario improvements should stimulate newtaxes on new business investment will stood at 43.4 per cent – higher than investment in Ontario by $47 billon,increase it. in the rest of Canada and all the which will create an estimated The best measure of the tax rate is countries where our peer regions are 591,000 net new jobs and increasethe marginal effective tax rate (METR) located (Exhibit 25). labour income by nearly 9 percent.50on new business investment. This Ontario is now a low tax jurisdictioncaptures the total tax impact of the for business investments. 49 Task Force on Competitiveness, Productivity and Economic Progress, Seventh Annual Report,next dollar invested by business – in But since 2007, our federal and Leaning into the Wind, November 2008, pp. 39­41.buildings, equipment, and technology, provincial governments have been 50 Jack Mintz, “Ontario’s Bold Move to Create Jobsfor example. It accounts for the taxes reducing corporate income tax rates. and Growth,” SPP Communiqué, School of Public Policy, University of Alberta, November 2009.on future profits that the investment They have been eliminating thewill generate, the capital taxes on the destructive capital tax, so that it is now50  PROSPECTS FOR ONTARIO’S PROSPERITy
  • suPPort and PressurePublic policy needs to drive both support andpressure to enhance our innovation performance Exhibit 26 Support and pressure drive innovation SUPPORT PRESSURE • Government funding for R&D • Sophisticated consumers • University education of master’s and • Aggressive competitors PhD students • Investor demand for profitable • Skilled investors INNOVATION growth • Capable managers • Challenging international consumers • Larger markets and better supply chains through international trade • More intense global competition Source: Institute for Competitiveness & Prosperity.We draw on the framework of support and pressure to assess our innovationresults and make recommendations for the future (Exhibit 26). Supportrefers to the conditions that provide a foundation of assistance to all firms andindividuals as they develop and compete. Pressure comes from aggressiveand capable competitors who threaten complacency and from sophisticatedcustomers who demand innovative goods and services at low prices. Our key findings over the decade are that we have improvement opportuni-ties in several elements that affect support and pressure:• We have an excellent base of clustered industries in Ontario, but we need to increase their innovation and productivity performance• Fewer Ontarians live in metropolitan areas, and this limits the support and pressure for innovation• The quantity of our venture capital has been declining, but we conclude that the bigger opportunity is in increasing the quality of our venture capital• The federal government has negotiated several trade deals over the last decade – a positive step for support and pressure – but the focus needs to shift to bigger deals• While we have many more global leaders in Ontario than 1985, we have had a net loss in the past decadePublic innovation policy needs to consider both support and pressure.Among the relevant areas,we see more international trade as a majoropportunity on both sides of the framework.52  CHAPTER PROSPECTS FOR ONTARIO’S PROSPERITy
  • ontario’s employment advantage in clustered industries hasnot delivered higher productivitywhy clustered because they require economies of held steady over the last decade,industries matter scale or specialized skills or both. Since although the percentages have fallenHarvard’s strategy professor, Michael they compete outside their locality, slightly for both Ontario and the peerPorter has identified three types of they are forced to become more states over the decade.industry groups in the United States. innovative and productive. Hence they The challenge we face in Ontario asThe Institute has adapted his approach pay higher wages. we have discussed earlier in this report,to Canada. Porter’s third group of industries is to gain more advantage from this Most industries, accounting for 65.1 are natural resource endowed good industry mix. This advantageouspercent of employment, are dispersed industries – like forestry or farming. mix should drive our productivity andgeographically on the basis of popula­ Their location depends entirely on innovation above the peer states. Buttion. Examples of these dispersed – or where the natural resource is found. we do not compete effectively in theselocal, as Porter calls them – industries These account for only 0.8 percent of industries and trail on these measuresare retail outlets and restaurants. Firms employment in Ontario. in most clustered industries.in these industries typically compete Having a higher percentage oflocally and are less exposed to compe­ employees in clustered industries gives outlook for 2020tition from other cities, regions, or a jurisdiction an advantage in innova­ Our industry mix advantage is not likelycountries. As a result they are less tion, productivity, and prosperity. In a to decline in the coming years.innovative, as measured by patents, city region, the higher wages paid in If we are to realize our prosperityand pay lower wages. clustered industries pulls along the advantage, our clustered industries The next group is clustered, or wages paid in dispersed, local indus­ need to be more innovative and delivertraded, industries. These industries are tries.51 Clustered industries are more higher productivity.not found everywhere but instead likely to employ people workinggather in specific cities or regions. They in creativity­oriented occupations 51 Working Paper 5, Strengthening structures: Upgrading specialized support and competitivedepend on their survival by selling to – Richard Florida’s creative class. pressure, pp. 20­21.consumers across the country andaround the world. These 41 identified how ontario has performedclustered industries, like automotive Ontario has an advantage over the peermanufacturing (in parts of southern states, in that 34.1 percent of ourOntario), financial services (in the workers are employed in clusteredToronto region), and bio­pharmaceutical industries, compared to only 27.7(in Toronto and Montreal), percent at the median of our peerare geographically concentrated states (Exhibit 27). This advantage has Exhibit 27 Ontario has a higher share of its workers in clustered industries Percent of employment in clustered industries 2002–2010 40% Ontario 35 30 North American peer median 25 2002 2006 2009 2010 Ontario 1st 1st 1st Rank Source: Institute for Competitiveness & Prosperity analysis based on data from Statistics Canada and Institute for Strategy and Competitiveness, Harvard Business School. SUPPORT AND PRESSURE 53
  • ontario’s lower rate of metropolitan development hampers our productivity Exhibit 28 Ontario’s lower percentage of population in metropolitan areas reduces its productivity Metropolitan population and labour productivity 2009 Labour productivity index (Ontario = 100) 160 150 New York 140 Massachusetts California 130 New Virginia Illinois Jersey 120 North Carolina Texas 110 Indiana Pennsylvania Ohio Michigan Ontario 2009 Georgia Florida 100 Québec Ontario 2001 90 R2 = 0.54 80 65 70 75 80 85 95 100% Percent of population in metropolitan areas Note: Ontario 2001 relative labour productivity is indexed to Ontarios 2009 relative labour productivity Source: Institute for Competitiveness & Prosperity analysis based on data from Statistics Canada, 2006 Census; Provincial Economic Accounts; Labour Force Survey; US Census Bureau; US Bureau of Economic Analysis, Regional Economic Accounts; US Bureau of Labor Statistics.why urbanization matters spillovers and innovation56 and that one that is inevitable, and our provincialWhen more people live in cities, there new patent applications are more and municipal governments needis higher economic growth, for several likely to cite geographically proxi­ to ensure we are making adequatereasons: mate patents.57 investments in infrastructure to• Cities are centres of economic activ­ facilitate this move and support growing ity. The 681 metropolitan areas with how ontario performs urban populations. more than 500,000 people account One measure of urbanization is the for about 25 percent of the world’s percentage of people living in metropoli­ 52 Richard Florida, Charlotta Mellander, and Tim Gulden, “Global Metropolis: The Role of Cities and population but nearly 60 percent of tan areas – regional agglomerations of Metropolitan Areas in the Global Economy,” Martin Prosperity Institute Working Paper, March 2009, p. 10. economic activity.52 an urban core and surrounding suburbs. 53 See for example Pierre­Philippe Combes et al.,• Cities are more productive. As far The Toronto Census Metropolitan Area, “The Productivity Advantages of Large Cities: Distinguishing Agglomeration from Firm Selection,” back as Adam Smith in 1776, econ­ for example, as defined by Statistics CEPR Discussion Paper No. DP7191, March omists have theorized that firms Canada, encompasses the City of Toronto 2009: 1, and Edward L. Glaeser, “Why humanity loves and needs cities,” New York Times, 13 April and workers are more productive in and municipalities stretching west to 2010, <http://economix.blogs.nytimes.com/2010/ larger cities. Recent research con­ Oakville, north to Lake Simcoe, and east 04/13/why-humanity-loves-and-needs-cities> (accessed July 15, 2010). firms this.53 to Ajax. Across states and provinces, 54 See for example Gerald A. Carlino et al., “Urban Density and the Rate of Invention,” Journal of• Cities support new ideas. The inter­ greater productivity is associated with a Urban Economics, Vol. 61, No. 3, May 2007, action of highly skilled people, higher share of people living in metro­ pp. 389­419; Edward L. Glaeser, “Why humanity loves and needs cities;” and Jane Jacobs (1969), competitive businesses, and sophis­ politan areas and Ontario has lagged The Economy of Cities, New york: Random House. ticated institutions found in cities through the decade (Exhibit 28). We 55 Richard Florida, Technology and Tolerance: The Importance of Diversity to High-Technology spurs innovation.54 estimate that this lag costs us $1,500 Growth, Center on Urban and Metropolitan Policy,• Cities are centres of knowledge and per capita in productivity and prosperity. Pittsburgh 2001. 56 David A. Wolfe and Allison Bramwell, “Innovation, creativity. Richard Florida observed Creativity and Governance: Social Dynamics of that innovative people choose to live outlook for 2020 Economic Performance in City Regions,” Innovation: Management, Policy & Practice 10, December in areas with the high level of cultural Where we live and work is a choice 2008, pp. 170­182. diversity that only cities can offer.55 Ontarians have made – one that we 57 Adam B. Jaffe et al., “Geographic Localization of knowledge Spillovers as Evidenced by Patent Others have concluded that urban have no desire to change. But the trend Citations,” Quarterly Journal of Economics, Vol. 108, No. 3, August 1993. density is critical for knowledge for people to move to urban areas is54  PROSPECTS FOR ONTARIO’S PROSPERITy
  • Quality of venture capital still needs to be improved Exhibit 29 Venture capital investment in Ontario trails US leaders’ quantity and quality Venture capital investment as a percent of real GDP (C$ 2010) 3-year venture capital annualized returns 2001–2010 2001–2010 3 year returns 1.5% 50% California, Massachusetts (weighted average) 25 20 15 United States 1.0 10 5 Data not available 0 2001 2004 2007 2010 -5 Canada 0.5 -10 Ontario -15 -20 North American 0 peer median Data not available -25 2001 2004 2007 2010Ontario 13th 13thRank Note: Dotted line represents estimated values. Source: Institute for Competitiveness & Prosperity analysis based on data from the Canadian Venture Capital Association, Private Equity Association,the National Venture Capital Association, Cambridge Associates LLC, Macdonald & Associations, PriceWaterhouseCooper, and Thomson Reuters.why venture capital matters how ontario has performed outlook for 2020Venture capital is an important source of Whether or not Ontario has had an While venture capital has been anfunds for our entrepreneurial firms as adequate amount of venture capital is important element in creating innova­they expand. Specialist investment ambiguous. On the one hand, venture tive companies, it may be that themanagers raise funds for pools of capital capital funds as a percentage of GDP traditional model is broken. The “leanfrom pension funds, large investment in Ontario are at the median of the startup model” may be more appropri­portfolios, corporations, and high net experience of the sixteen North ate. This approach challenges managersworth individuals. These venture American peer jurisdictions (Exhibit receiving funds to operate by theircapitalists seek out promising young 29). On the other hand, we trail the bootstraps and find ways to scale upfirms, which typically focus on innova­ leaders in venture capital investment, their business model to profitabilitytion through technology. In addition to California and Massachusetts, quite much faster than is currently typical.providing startup capital to facilitate considerably. In addition, the amount of Opportunities may exist for thegrowth, the venture capitalist usually available venture capital in Ontario provincial government, in partnershipprovides expertise on management and has fallen significantly over the past with business schools and organiza­on the technology or relevant markets. few years. tions like MaRS in Toronto, to learn The support of funds, expertise, and On the quality of our venture capital, more about the concept of leanknowledge has been very important to the results are unambiguous – we startups and identify ways for it to gainthe development of high growth firms have generated dismal returns for traction in Ontario.that have driven innovation and investors since 2002. An importantproductivity. Firms like Apple, Google, contributor to this poor record has 58 Seventh Annual Report, Leaning into the wind, p. 45.and Research in Motion are just a few been public policy which has usedof the world’s leading firms that were special tax support for individualsfinanced by venture capital in their investing in Labour Sponsored Invest­formative years. ment Funds. This policy has helped A healthy venture capital market with raise venture capital funds, but thea high quantity and quality of funds is quality has been lacking.58an important foundation for innovationand prosperity. SUPPORT AND PRESSURE 55
  • we have negotiated many small trade deals; we should move to some bigger deals Exhibit 30 Canada has negotiated or is in the process of negotiating several trade deals developing new products and processes, adopting advanced manufacturing technologies, and investing in worker CANADIAN FREE TRADE AGREEMENTS SIGNED SINCE 2001 Two-way merchandise trade as training. The result was an additional Country a percent of total trade volume, 2010 productivity increase of 5 percent in Costa Rica (2002) <0.1% the typical Canadian plant – for a total Peru (2009) 0.3 productivity gain of 13 percent. This is European Free Trade Association* (2009) 1.6 a remarkable achievement. Colombia (2010) 0.2 Jordan (2010) <0.1 how ontario has performed Panama (tabled in House of Commons) <0.1 In the past decade, Canada has signed PENDING TRADE AGREEMENTS several free trade agreements and is in South Korea (13th round of trade negotiations) 1.2% the process of negotiating more (Exhibit Central American Four** (12th round) 0.1 30). This is encouraging, especially in European Union (9th round) 10.3 light of the current global economic Singapore (8th round) 0.2 downturn and a tendency toward Honduras (3rd round) <0.1 protectionism. Most of the trade deals, India (3rd round) 0.5 however, have not been with major econ­ Ukraine (3rd round) <0.1 omies. Other than the current negotia­ Caribbean Community*** (3rd round) 0.3 tions, none of the partners represents Morocco (1st round) more than 2 percent of our trade flows <0.1 – with the exception of the Canada­ Dominican Republic (1st round) <0.1 European Union negotiations. Recently, Turkey (public consultation) 0.2 Prime Minister Harper appointed * includes Liechtenstein, Norway, Iceland, and Switzerland **includes Honduras, Guatemala, Nicaragua, and El Salvador Scotiabank CEO, Rick Waugh, to head *** includes Antigua and Barbuda, The Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, Montserrat, Saint Lucia, St. Kitts and Nevis, St. Vincent and the Grenadines, Suriname, Trinidad and Tobago up a Canada­Brazil forum of business Source: Institute for Competitiveness & Prosperity analysis based on data from the Department of Foreign Affairs and International Trade, Industry Canada, and Statistics Canada. leaders. This initiative is a long way from reaching a trade agreement – and there will be many hurdles to clear – but it is awhy trade matters market and pressures domestic innova­ step in the right direction.Expanding trade adds support and tion laggards to innovate more.59pressure to drive innovation by Undoubtedly, foreign competition, outlook for 2020Ontario’s businesses. through trade, has its downside. Uni­ Canada should turn its attention to On the support side, the greater market versity of Toronto economics profes­ negotiating larger trade deals, such assize for our businesses means that sor and Task Force member Dan Trefler the Canada­EU one currently under way.expensive R&D and technology invest­ analyzed the impact of the 1989 Can­ The Ontario government played a keyments for innovation can pay off. Access ada­US Free Trade Agreement and con­ role in persuading the federal govern­to suppliers that are globally competitive cluded, however, that its net effect was ment to launch these negotiations. Weprovides support for our firms to develop positive.60 While increased pressure encourage both governments to pushbetter supply chains and enhance their caused many Canadian plants to con­ ahead on possible bilateral agreementsproduct and service offering. tract or close – costing about 100,000 with the BRIC countries, especially On the pressure side, exposure to jobs – most of the displaced workers China and India. At the same time, weforeign competition in our domestic and found jobs in export­oriented plants, so need to keep the friendly pressure onforeign markets challenges our firms to that unemployment rates did not rise, our US neighbours to discourage payingperform better. A broader range of cus­ and wages did not fall. heed to domestic protectionist voices.tomers outside Canada heightens the The benefits of the Agreement werepressure for more innovative, sophisti­ far larger. Expansion into the United 59 Philippe Aghion and Peter Howitt, The Economics of Growth. Cambridge: MIT Press, 2009.cated products and services. Research States by our more productive firms 60 See Daniel Trefler, “The Long and Short of theby economists Philippe Aghion and raised average Canadian productivity by Canada­U.S. Free Trade Agreement,” American Economic Review, Vol. 94, No. 3, SeptemberPeter Howitt shows that more access an astounding 8 percent. The agreement 2004, pp. 870­89; Alla Lileeva and Daniel Trefler, “Improved Access to Foreign Markets Raisesto foreign markets supports domestic also led many Canadian firms to engage Plant­Level Productvitiy… for Some Plants,”innovators by increasing their potential in productivity­enhancing activities: Quarterly Journal of Economics, Vol. 125, No. 3, August 2010, pp. 877­921.56  PROSPECTS FOR ONTARIO’S PROSPERITy
  • Ontario lost global leaders through the decade Exhibit 31 Ontario has gained Global Leaders since 1985, but has lost ten since 2003 2003 48 Companies Ashton-Potter (MDC) ATI Technologies ATS Barrick Gold CCL Industries Celestica Chemtrade Logistics 2011 Cinram Connors Bros. 38 Companies Coolbrands* Cott ATS DALSA Barrick Gold Falconbridge Brookfield Asset Management Four Seasons CCL Industries GSW Celestica Harlequin (Torstar) Chemtrade Logistics Hummingbird Cinram Husky Injection Molding COM DEV International IMAX Cott Inco DALSA Lallemand EXCO Technologies MAAX FirstService (Colliers) Magna Goodlife Fitness Manulife Financial Harlequin (Torstar) Masonite Husky Injection Molding (Onex) 1985 MDS IMAX 19 Companies Mitel Lallemand Moore Corporation MAAX (Tricap Partners) Norbord Magna Abitibi-Price Nortel Manulife Financial AMCA North American Fur Auctions MDS Nordion Canada Malting Open Text Mitel CCL Industries Patheon Neo Material Technologies Falconbridge Pollard Holdings Norbord Geac Computers Rand A. Technology North American Fur Auctions Harlequin (Torstar) Research in Motion Open Text Hiram Walker Scotia Mocatta Research in Motion Hudsons Bay Company (North American Fur) Shaw Industries Royal Bank of Canada Inco Skyjack (Linamar) Samuel, Son & Co. Laidlaw Student Transportation Scotia Mocatta Lumonics TD Waterhouse ShawCor Mitel Thomson Corporation Skyjack (Linamar) Moore Corporation Timminco Student Transportation National Business Systems TLC Vision TD Ameritrade Scott s Hospitality Wescast Industries Thomson Corporation Thomson Travel Weston Foods TLC Vision Timminco Zarlink Wescast Industries Trizec Zenon Environmental Zarlink Departures between 1985 and 2003 Departures between 2003 and 2011 Arrivals between 2003 and 2011 Source: Institute for Competitiveness & Prosperity analysis.Why global leaders matter discussions is that Canada is being moved out of the province – patheon toour global leaders – Canadian-based hollowed out by foreign takeovers of the us and pollard to Manitoba; andfirms with revenues greater than $100 our great companies. the evidence is one was taken over by another Cana-million and standing fifth or better in very slim. We have many more global dian global leader – Hummingbird,their global product or service markets leaders today than back in 1985. acquired by open text.– are important elements for our inno- But in ontario, the number of globalvation capacity. Global leaders are leaders has been falling in the past Outlook for 2020vanguards for other companies in decade. While we have many more than the fact that Canada is maintaining itsour economy, pointing to strategies in 1985 (Exhibit 31), we have experi- global leader count while ontarioof success and serving as models to enced a net loss of 10 global leaders in is falling back indicates that ourwhich our smaller firms can aspire. ontario since 2003. this is the result of province is at some risk of declining in Global leaders are exceptionally losing 18 and adding 8 between 2003 economic importance inside Canada.well managed – comparable to the best and 2011. of the 18 losses, 10 were We are confident that ongoing invest-in the world. foreign takeovers, such as Inco and ments in human capital and tax reform Falconbridge; 5 firms were displaced will make ontario a place whereHow Ontario has performed from global leadership, such as Cool- successful firms can thrive and achievea recurring theme in economic policy brands and rand technologies; 2 global leadership. support and pressure 57
  • actions forinnovation andProsPerity 2020
  • ovEr thE pAst dEcAdE, wE hAvE bEEn plEAsEd that our recommendationsto fulfill our prosperity potential have found their way into public policydiscussions. Most notably, we think the province is on the right track withits investments in post secondary education, its improvements in tax policy,and the growing recognition of the true nature of innovation. Clearly,more remains to be done to achieve our 2020 Prosperity Agenda – inpublic policy and by our business leaders. For the next decade, we proposeseveral actions to put Ontario on the right track to leadership in innovation,productivity, and prosperity.work effort and productivityEncourage productivity and innovation to enable ontario tobecome a prosperity leader in 2020Remain determined to close the prosperity gap by makingOntario a productivity and innovation leader. Ontarians do nothave an attitude deficit in our will to win, our desire for innovation, orour recognition of the benefits of risk taking. Our real challenge is tomaster the conditions and the context in which we compete globally.Public policy needs to encourage innovation and competition through ourtaxation, regulatory environment, and our openness to internationaltrade and investment. As worries increase about a continued economic weakness and financialinstability, Ontario and Canada have to lead the world in fighting protectionistsentiments that focus on maintaining the status quo. Instead, Canadians needto be open to innovation as a way of life in our businesses and governments. These are first steps in making Ontario a productivity leader, not a laggard.The balance of our recommendations should complete this journey.human capitalmake ontario a leading centre for talent and skillsContinue investments in educating people for Ontario’s competi-tiveness. Our federal and provincial governments face a critical balancingact. Current deficits are unsustainable, and spending has to be reined in. Asgovernments consider their spending priorities, we urge that they continue toplace post secondary education high on the list. Our funding priorities remainthe same: increasing the number of master’s degrees attained; expandingaccess to our universities, especially for youth from demographic groupswho tend to participate less than others in post secondary education; andimproving the student experience in our universities.  59
  • Businesses, governments, andindividuals need to step upinvestments in their capabilitiesfor innovation. We have to avoid the mistakes we made in the mid-1990s when we facedsimilar pressures to control spending. Back then, the government curtailedspending on both health care and education. But in the ensuing recovery,when deficits disappeared, health care spending was put back on track, whileeducation spending flat lined. If Ontario is to be an economy that is competingon creativity and innovation, our workers and managers need the skills andknowledge to thrive, which come from robust educational opportunities.Lower marginal effective tax rates for low-income Ontarians. TheWorking Income Tax Benefit (WITB) is a potentially effective approach tofighting poverty in Ontario. A refundable tax credit for low-income earners,it is designed to supplement low earnings from employment, encouragingthem to break out of welfare by seeking more work and to “make work pay.”However, the current WITB program is not doing the job as well as it could.This is because its current nominal design does not integrate well with othersocial assistance programs. Though the federal government has extendedan invitation for their provincial counterparts to modify the design of theWITB to suit their welfare programs, only Québec, British Columbia, andNunavut have done so. In Ontario, the WITB could be redesigned to promotemore hours worked; currently the design promotes part-time work by low-income earners. Ontario should strengthen incentives for more hours worked and co-ordinatebetter with its other social assistance structures. This would be a step in theright direction to help the working poor overcome the welfare wall andachieve full-time employment. We urge the Commission for the Review ofSocial Assistance to explore this in their research and deliberations.Consider wage insurance for assisting older displaced workers.Even without expanded trade agreements, globalization threatens our olderworkers with unemployment. The evidence indicates that this group ofworkers has the most difficulty with reengaging in the workforce. Weneed to investigate ways of helping these workers; current retrainingapproaches do not seem to work. We encourage federal and provincialpolicy makers to deepen their understanding of how wage insurance mighthelp them. This could be an important part of a redesign of the EmploymentInsurance program.60 PROSPECTS FOR ONTARIO’S PROSPERITy
  • investmentEncourage businesses, governments, and individuals to step upto the challenge of investing in our innovative capabilitiesIncrease business investment in research and development and ininformation and communications technology. Our businesses havefallen behind in their investments that support the capacity for innovation. Wechallenge business leaders to invest in technology, and especially software,from Canada and around the world that can help their top and bottom lines– which in turn will improve our province’s productivity and prosperity. Ourbusinesses trail their US counterparts significantly in software investments– the most sophisticated element of technology. We intend to explore this issuefurther in future research. The stronger Canadian dollar helps our businessesclose our technology gap with our US peers; the significant improvementsin our tax structure will also be beneficial. We encourage businesses,industry associations, and academics to engage fully in discussing therecommendations recently released by the Expert Review Panel on Researchand Development to the Government of Canada. Governments can certainlyhelp establish the context for investments in innovation, but this is primarilythe responsibility of a competitive and capable business sector.Pursue breakthrough tax policy innovations. The reductions incorporate tax rates, elimination of the capital tax, and the conversion of ourretail sales tax to a value added tax harmonized with the federal GST havemade Ontario a better-than-average jurisdiction for taxation on businessinvestment. But these improvements merely adopt current practices amongmost developed economies. Ontario and Canada have been laggards indeveloping innovative tax policy. Not since 1974, with the decision to indexmarginal income tax brackets, have we implemented tax policy that has notalready been adopted elsewhere first. It is time for Canada to be a tax policyinnovator – and Ontario can take the lead. We should explore several ideas– corporate taxation on the basis of cash flow, elimination of the corporate tax,and a personal tax system based on consumption, not income.Consider a carbon tax. To achieve reductions in carbon emissions andhelp build green industries, a carbon tax best strikes the balance betweenefficiency and effectiveness. It is not politically popular, to say the least.But it has several merits and should not be dismissed from the debate. A capand trade system has advantages, especially because it focuses on the quantityof carbon emissions desired. However, it has significant implementationchallenges. For example, it would be difficult to establish initial allowancesand governments would have to deal with arguments for special treatmentby various industries. ACTIONS FOR INNOVATION AND PROSPERITy 61
  • support and Pressuregear public policy toward more specialized support and highercompetitive pressure for innovationBalance our public innovation strategies. Our public innovationpolicy emphasizes the hard sciences and does not adequately recognize theimportance of innovation in business and management processes. Ourcompetitiveness and prosperity are built on a solid base of excellence in thesciences. Though leading high technology firms are founded by science andengineering graduates, successful innovation requires a balance of scienceand other management skills. This combination is important to achieve asuccessful transition from startup to thriving businesses. Governments anduniversities need to explore ways of increasing management education as away of improving our capacity for innovation.Continue to encourage federal efforts to expand internationalfree trade agreements and ensure we have the physical and socialinfrastructure to enable these agreements. We are encouraged bythe number of trade deals that our federal government has signed in the pastdecade and where negotiations are under way. We are hopeful that the currentnegotiations to expand trade between Canada and the European Union willlead to a signed free trade deal in 2012. It is already one of our importanttrade partners, and negotiations should be aimed at expanding this relation-ship further. Ontario and Canada need to ensure that our staff resources required fortrade negotiations are deployed in the most effective ways. While we areencouraged by the many trade deals we have signed or are negotiating,we urge both levels of government to make the large developing economies– India, China, and Brazil – priorities for expanded trade. We need to recognize that more trade benefits not only our exportersthrough access to larger markets, but also our consumers and all ourbusinesses, which must rise to the challenge of added pressure from stiffercompetition. As part of this, we need to invest in our border infrastructure toensure goods move as efficiently as possible. We also need to investigate waysof helping our workers who are displaced by increased trade. Current retrain-ing approaches do not seem to work. Other approaches like wage insurancemight be more helpful.62  PROSPECTS FOR ONTARIO’S PROSPERITy
  • Explore policy options to improve venture capital structures. Onemajor challenge in Canada has been to improve the quality of our venturecapital. Eliminating structures like the tax credits for Labour SponsoredInvestment Funds, as is underway in Ontario, will certainly help. But we needto recognize that the current venture capital model is broken – in Canada aswell as the United States. Returns to investors have been inadequate for nearlya decade. In some sense, venture capital needs to return to its roots – smallinvestments – to help new firms bootstrap to success. Two trends – lean start-ups and microfunding – may point the way to the future of venture capital.Public policy needs to take account of these changes and ensure we are notsimply promoting a tired model of venture capital financing.Review policies and programs on incentives to attract businessesto Ontario. We want more world-class firms investing here. However, theresearch indicates that targeted government incentives to attract suchinvestments are not often successful in increasing prosperity in a jurisdiction.As the provincial government looks to reduce spending in areas of low payoff,this is worth considering. At the very least, they ought to understand moredeeply how well previous targeted incentives have delivered long- termprosperity to Ontario.Keep the friendly pressure on our US neighbours to resistprotectionist impulses. Federal and provincial governments need to bein constant contact with their US counterparts. Our business and labourleaders have excellent contacts with US leaders through ownership andaffiliation. It is in their interest to persuade their counterparts that protection-ism is unhealthy on both sides of the border. ACTIONS FOR INNOVATION AND PROSPERITy 63
  • Previous Publicationsinstitute for competitiveness & prosperityWorking Papersworking pApEr 1 – A View of Ontario: Ontario’s Clusters of Innovation, April 2002working pApEr 2 – Measuring Ontario’s Prosperity: Developing an Economic Indicator System, August 2002working pApEr 3 – Missing opportunities: Ontario’s urban prosperity gap, June 2003working pApEr 4 – Striking similarities: Attitudes and Ontario’s prosperity gap, September 2003working pApEr 5 – Strengthening Structures: Upgrading specialized support and competitive pressure, July 2004working pApEr 6 – Reinventing innovation and commercialization policy in Ontario, October 2004working pApEr 7 – Taxing smarter for prosperity, March 2005working pApEr 8 – Fixing fiscal federalism, October 2005working pApEr 9 – Time on the job: Intensity and Ontario’s prosperity gap, September 2006working pApEr 10 – Prosperity, inequality and poverty, September 2007working pApEr 11 – Flourishing in the global competitiveness game, September 2008working pApEr 12 – Management matters, March 2009working pApEr 13 – Management matters in retail, March 2010working pApEr 14 – Trade, innovation, and prosperity, September 2010Reports on CanadaPartnering for investment in Canada’s prosperity, January 2004Realizing Canada’s prosperity potential, January 2005Rebalancing priorities for Canada’s prosperity, March 2006Agenda for Canada’s Prosperity, March 2007Setting our sights on Canada’s 2020 Prosperity Agenda, April 2008Opportunity in the turmoil, April 2009Beyond the recovery, June 2010Canada’s innovation imperative, June 2011task Force on competitiveness, productivity and Economic progressFirst AnnuAl rEport – Closing the prosperity gap, November 2002sEcond AnnuAl rEport – Investing for prosperity, November 2003third AnnuAl rEport – Realizing our prosperity potential, November 2004Fourth AnnuAl rEport – Rebalancing priorities for prosperity, November 2005FiFth AnnuAl rEport – Agenda for our prosperity, November 2006sixth AnnuAl rEport – Path to the 2020 prosperity agenda, November 2007sEvEnth AnnuAl rEport – Leaning into the wind, November 2008Eighth AnnuAl rEport – Navigating through the recovery, November 2009ninth AnnuAl rEport – Today’s innovation, tomorrow’s prosperity, November 2010Should you wish to obtain a copy of one of the previous publications, please visit www.competeprosper.cafor an electronic version or contact the Institute for Competitiveness & Prosperity directly for a hard copy.To learn more about64
  • How to contact Us to learn more about the institute and the task force please visit us at: www.competeprosper.ca should you have any questions or comments, you may reach us through the web site or at the following address:The institute for competitiveness & prosperity exeCutive DireCtor180 bloor street West, suite 1000 James B. milwaytoronto, ontario 416 920 1921 x222M5s 2V6 j.milway@competeprosper.catelephone 416.920.1921fax 416.920.1922 ProjeCt manager Tamer azer 416 920 1921 x228 t.azer@competeprosper.ca researChers colin Bradley 416 920 1921 x224 c.bradley@competeprosper.ca satyajit (sunny) dutt 416 920 1921 x223 s.dutt@competeprosper.ca shabnam mohsenzadeh 416 920 1921 x230 s.mohsenzadeh@competeprosper.ca melissa pogue 416 920 1921 x231 m.pogue@competeprosper.ca rebecca sun 416 920 1921 x238 r.sun@competeprosper.ca summer researChers samantha azzarello miguel colebrook steve el-Hage Lara guest Brendan Livingstone Design Hambly & Woolley inc. www.hamblywoolley.com illustrations: hambly & Woolley inc.