Industrial policy is back — except in Ontario

Industrial policy — government interventions to grow and improve the competitiveness of select industries — is back in fashion, according to a new paper by John M. Curtis and Dan Ciuriak published by the Institute for Research on Public Policy (IRPP).
In fact, industrial policies never really went out of style, except in the Anglo-American democracies. For the past three decades governments in the Anglosphere — regardless of the party in power — have shied away from industrial policies and embraced the notion that state interventions to promote specific economic sectors usually do more harm than good. This is allegedly because governments don’t have the necessary information to “pick winners.” The market, according to this view, is always far superior at allocating resources than any government ever could be.
Under this paradigm, the best thing governments can do to promote investment, industrial development and economic growth is to get the so-called economic fundamentals right and let the market — that supreme and venerable vehicle for the efficient allocation of resources — take care of the rest. In practice, the prescription calls for low taxes on capital and income, balanced budgets, low debt, low and stable inflation and a light regulatory touch. These are the necessary ingredients that will permit the market to work its magic on the economy.
Governments in this country have by and large bought into this mainstream view for over two decades, and have implemented this policy agenda, to varying degrees. Successive governments in Ottawa, for example, have rarely missed an opportunity to brag that Canada has the best economic fundamentals in the G8.
In the context of this conventional wisdom, the industrial policy light has barely flickered in this country.
But now, according to Curtis and Ciuriak, industrial policy is resurging, even in the more skeptical Anglo-American countries. They argue this is due to the global financial crisis/recession, and the slow and uneven economic growth that has followed. Governments are increasingly looking for some way — any way — to get growth back onto a decent trajectory, and in particular to regenerate manufacturing industries that were hit very hard during the recession.
This marks a big shift in attitude. For decades, governments in this country wouldn’t utter the phrase industrial policy for fear of being labelled economically illiterate by the high priests of mainstream economics and their apostles in the business media. Today, however, the competency of the economics profession is in serious question given its role in creating the intellectual foundations for the policies that brought on the global banking crisis of 2008-09 and the worst recession many countries have experienced in 80 years. Not to mention the fact that mainstream economics’ remedies to the crisis have produced scant growth in most countries thus far.
We might now, therefore, be on the cusp of a new economic policy paradigm. As Curtis and Ciuriak claim, it is those countries with robust industrial policies — especially in Asia and other emerging markets — that have seen superior growth performance post-recession. Those are the kind of facts — as opposed to theory — that tend to catch the attention of governments struggling for an economic narrative to put to citizens in a slow-growth and relatively high-unemployment context.
Canada is no exception. The Harper government, on paper the most free market administration in living memory, is adopting a more industrial policy-friendly mindset. There is evidence of this in policies to promote extractive industries, but also with significant new initiatives in the aerospace and defence sectors, both of which are well-known candidates for industrial strategies in almost all advanced countries. The relatively new Federal Economic Development Agency for Ontario is also to a degree an industrial policy instrument.
Curiously, though, the one government in Canada that you would expect to be embracing industrial policy seems lukewarm to it. Ontario has experienced the most alarming economic transformation of any Canadian province in recent years. Its manufacturing sector lost 255,000 jobs over the last decade. The province’s share of Canadian GDP fell from 41 per cent to 37 per cent over that same time period. For three years now, Ontario, traditionally the milch cow of Confederation due to its powerhouse industrial economy, has been officially a “have not” province, receiving billions of dollars in equalization payments from Ottawa annually.
Yet we seem to see more enthusiasm for industrial policy in blue Ottawa than in red Queen’s Park, which still emphasizes deficit reduction as the key to Ontario’s economic prosperity. While the Wynne government is pursing an aggressive transit agenda, it seems less enthusiastic than its predecessor in developing “green” manufacturing to offset some of the decline in the auto industry, and shows little interest in policies aimed at other sectors that offer promising growth opportunities.
Now is probably the time for the Ontario government to embrace the industrial policy paradigm and advance an economic agenda for the province that works in practice but maybe not so well in theory.

Productivity and pay – why Canadians are (somewhat) better off

Comparing ourselves with the United States is a national pastime in Canada. Sometimes the comparison makes us look good (health care, public education).
Sometimes it makes us look bad (consumer prices, productivity). Sometimes it reveals an altogether more nuanced story. Sadly, we often miss the nuance.
A month ago, the New York Times published a piece, titled Our Economic Pickle, on the conundrum represented by increasing productivity and declining real wages. Workers are producing more, yet taking home less of the overall pie: wages now represent only 43.5 per cent of GDP, down from over 50 per cent of GDP in the 1970s. Corporate profits are at an all-time high while wages and median household income have both fallen.
Within that 43.5 per cent, it is the top earners who are doing best — a familiar story from the broader income inequality debate. In 1979 the top one per cent took home 7.3 per cent of total wages. By 2010 this had risen to 12.9 per cent. This makes sense to those who have been following trends in income polarization: the ultra-rich are increasingly self-made and they earn wages, in large amounts, rather than rely on inheritances. The fact that their share of the pie has gone up by 50 per cent is no surprise.
At the opposite end of the spectrum, things are looking grim for U.S. workers: labour productivity has increased by 80 per cent since 1973 but median hourly compensation has gone up by only 10 per cent. Real GDP has increased by 18 per cent but median household income has fallen by 12 per cent since 2000. ‘Shared prosperity’, as the basis for societal cohesion, appears to have fallen by the wayside.
Is the same true in Canada? Somewhat. One of the biggest problems in this country is labour productivity: this rose by only about 50 per cent between 1980 and 2012 — about 30 per cent less than in the U.S. Average (mean) real hourly wages certainly did not keep up. They grew by 4 per cent between 1981 and 1998, before advancing at a more rapid rate between 1998 to 2011 for a cumulative 14 per cent increase. While by no means perfect, this is significantly better for workers, when lower labour productivity increases are factored in, than in the U.S.
This Canadian ‘advantage’ is reflected in the aggregate figures. In the U.S., the share of wages, salaries and supplementary labor income to GDP has fallen over time — from a high of nearly 54 per cent in the late 1960s to less than 44 per cent now. In Canada it has remained stable, close to 50 per cent of GDP (51 per cent in 1961 and up to 52 per cent in 2011). And in Canada we have minimum wage rates that substantially exceed those in the U.S.
In this week’s State of the Union address, President Barack Obama proposed raising the federal minimum wage in the U.S. from $7.25/hour to $9/hour. Few feel confident that he will be able to achieve this. Meanwhile, hourly minimum wages in Canada — which are set by provinces — vary from $9.50 in Saskatchewan to $11 in Nunavut (Ontario currently stands at $10.25, Quebec at $9.90 and Alberta at $9.75). Goods certainly cost more here — as was confirmed by a recent Senate report on the Canada/U.S. price gap — but at least those at the bottom of the wage scale take more home per hour.
One reason for this may be the relative rates of unionization in the two countries. Unions now represent around 11 per cent of American workers (though less than 7 per cent in the private sector) as opposed to 28 per cent in the 1960s. In Canada the unionization rate is still above 30 per cent, close to the U.S. mid-1950s peak of 35 per cent.
What does this tell us? That our problems are not as severe as those in the U.S.? Yes, at some level that is certainly true. But societies should judge themselves by what they themselves can bear and not by comparison with others. As is the case in the health care debate, if we stop thinking about the U.S., things do not look that great in Canada.
Collapse is by no means imminent, but we do need to do some soul-searching on how we want to move forward and what value we place on the factors that distinguish us from the U.S.