Wednesday, February 02, 2005

Canada lacks political will to foster true competitive spirit

by Liam Lahey

Compared to our American cousins, Canadians are uneducated and less prosperous, while our corporations are overtaxed to the point of under-investing in the technologies that will ensure global competitiveness and future prosperity.

So said Roger Martin, chairman for the Institute for Competitiveness & Prosperity (ICP) and dean of the Rotman School of Business at the University of Toronto.

Speaking to a gathering at Microsoft Canada Co.'s 'Heroes of Innovation' event in Toronto Wednesday, Martin said Canadian businesses, all levels of government, and individuals need to work together to "close the prosperity gap" that has emerged over the last 20 years with the U.S.A.

Martin authored the "Realizing Canada's Prosperity Potential" report, ICP's latest, to gauge Canadian competitiveness, productivity, and economic progress. The findings show Canada's continued under-investment in software, capital equipment, and machinery is one of the key factors hampering business productivity and competitiveness, resulting in a 16 per cent prosperity gap compared to the U.S.

The ICP report also showed from 1991 to 2003, Canada's business community annually invested an average of 13.1 per cent less than U.S. businesses in software, capital equipment, and machinery.

"Investing in software is one way to help increase productivity, drive innovation, and increase our competitiveness on the world stage," Martin said. "We are lucky to be living in a country as prosperous and as equitable as Canada. We are the second most prosperous country in the world of any nation of our size (by population), trailing only the U.S.

"There is one worrisome trend: Our prosperity relative to the only richer country -- the U.S. -- has worsened dramatically over the past 20 years. In 1981, our prosperity gap with the U.S. was a mere $1,800 in GDP (Gross Domestic Product) per capita. In 2003, it was $7,200 in GDP per capita . . . the gap is nearly four times as big making us 16 per cent less prosperous than the U.S."

Referring to GDP as a 'weird term' reserved for geeky number crunchers like himself, Martin said in real terms, it means for the average family of four living in Canada, they're losing $15,000 in after-tax disposable income per year, compared to an American family.

"That is a gigantic number. That's enough to pay for every residential mortgage payment in Canada, every apartment unit in Canada, every new car purchase in Canada, and every vacation taken by Canadians, all lumped together," he said. "This has a huge impact on the living standards of Canadians. Over and above that, it would mean an extra $90 billion a year in federal and provincial tax revenues at the same tax rates (as today)."

Calling these numbers extraordinary, Martin said if we closed the prosperity gap with the U.S., it would reap the biggest expenditure increase in health care, education, and infrastructure in Canadian history.

Canadians have long fancied comparing themselves with Americans. One could say we widely consider ourselves to be better educated that the U.S.

Not so evidently. Citing under-investment as the primary cause for and comprising 40 per cent of the prosperity gap, Martin said individuals have under-invested in their own education and that Canadians are considerably less educated than the U.S. workforce.

Moreover, Canuck companies are investing less in innovation and upgrading their systems generally, he said. So what is it about Canadians? Do we have lousy attitudes towards competition or working hard? Thankfully not; Martin said current corporate tax structures are to blame as they strongly discourage investment.

Even after taking into consideration the cost of the Canadian social safety net, "our effective tax rates are double that of high tax states such as Massachusetts, California, and Illinois; it's 30 per cent versus 15 per cent tax on capital," he said. "This has absolutely got to come down. The corporate taxation policies in Canada are just dumb. This is not a left versus right issue."

Sweden, Finland, and Japan have dramatically lowered tax rates on capital in recent years, he said. "Taxing corporations investing to create high-paying jobs is a dumb idea. We still haven't figured that out.

Regarding federal regulatory barriers to competition as it pertains to the smaller Canadian marketplace, Martin said these issues make it less necessary or immediate for a Canadian firm to invest in innovative and upgraded products and services. We don't need governments to keep our markets closed, he said. Competitive pressure is the key to prosperity, not the problem.

Government spending habits on the other hand, do pose a problem. Martin said while Canada has reduced its investments in future prosperity by 12 per cent per capita over the last decade, the U.S. Government has increased its investments by 26 per cent.

"It's much easier to cut investments than to cut current consumption," he said. "This takes political will and we haven't had enough of that in Canada over the past decade."

There are many solutions to the problem, Martin said, including companies investing in IT as if their corporate lives depended on it. Plus, the government needs to reduce corporate taxation on investment capital and open up the Canadian marketplace and reduce regulatory barriers to competition.

"That's not to say, reduce regulation on safety, the environment, and the like," he said. "It's regulated entry into industries, regulations that banish foreign firms from owning Canadian industries, those are the kinds of regulations specifically that hurts competition."

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