Coyne: Work still needed on Canada's perplexing productivity gap

Government in Canada having reached the summit of efficiency, politicians have lately taken to scolding the private sector for failing to do the same. In language reminiscent of war-bond drives, businesses find themselves increasingly exhorted to raise productivity, as if they were letting down the side.
"Governments are doing their part," Tony Clement, then the industry minister, complained, in a typical outburst. "Where's business? When is business going to do its part?" Often this takes the form of a sporty metaphor. Government has been investing, according to the finance minister, Jim Flaherty: "We have to now ask the private sector to step up to the plate."
Now, sticklers may point out that the economy is not, in fact, a baseball team, and that businesses are under no actual obligation to raise productivity, except as and so far as it is of benefit to their shareholders. They will make the required investments if it is in their interests to do so, and only then.
Nevertheless, there is a germ of truth somewhere in this rhetorical Petri dish. Policy-makers have got a lot of things right over the last 20 years. They've freed trade, cut corporate tax rates, beat inflation down to near zero. Yet productivity growth in Canada has lagged behind that of most other developed countries. As recently as 2000, Canadian workers were roughly 85 per cent as productive as those in the U.S. Since then that ratio has fallen to 70 per cent.
So baffling is this "productivity puzzle" that some economists have all but given up trying to understand it. Notable among these is Don Drummond, the former Finance Department economist lately observed redesigning the government of Ontario. Yet even he declares himself stumped. In a recent paper he confesses that "everything I have ever done on productivity" is a failure, to the point that "if asked today what policy changes should be implemented to promote productivity growth I would need to say I do not know."
Steady on. Even if governments have made some progress in unwinding past policy failures, they still have plenty of work to do. All of the literature on productivity stresses the vital role of competition as a driver of productivity. Yet important sectors of the Canadian economy, for example transportation and telecommunications, remain protected, over-regulated backwaters, sheltered from foreign or domestic competition. Governments at every level continue to hand out billions in subsidies to businesses of all kinds, rewarding inefficiency and distorting investment; billions more are dispensed out the back door, via tax preferences. Income tax rates have been slashed for corporations, but remain as high as ever for individuals. And so on.
It's possible, moreover, that the productivity problem has been overstated: that, to the extent Canadian business has failed to invest or innovate, it may not be on account of an inexplicable failure to exploit opportunities to improve efficiency, but rather has more rational causes. There are three ways in which this might be true.
The first has to do with the rapid rise in prices over the last decade for the commodities Canada exports, such as oil: as economists say, there has been an improvement in Canada's "terms of trade." One way to raise living standards is to increase productivity: if you can make each thing for less cost, you get more things. But another way is by charging other people more for the things you make. So part of our productivity problem may simply be a reflection of our good fortune as a nation in possessing resources that are in high demand around the world.
The flip side of that, second, is the decline in manufacturing, driven in part by the rising "petrodollar" of which the Ontario premier has recently complained. Until about 2000, Canada's productivity growth tracked fairly closely with that of the United States, only falling off after then. Delve into that overall productivity performance, and you find it is largely driven by sharp declines in the manufacturing sector. Why is that? A recent Statistics Canada study finds that factory production has fallen so far below capacity that firms are using capital less efficiently, giving up economies of scale they would previously have enjoyed.
A third factor may be the rapid growth in Canada's labour force in recent decades, a combination of the baby boom and the increasing numbers of women in paid work. Notwithstanding the best efforts of government, Canada's labour market managed successfully to absorb these newcomers; on the brink of the financial crisis, in 2008, the employment rate hit an all-time record 63 per cent. With so much labour on hand, firms had less need to invest in new machinery: it was cheaper to just take on more workers.
But over the next few decades, the labour force is projected to grow much more slowly, if at all. That's concerning: if productivity growth does not rebound, living standards will take a hit. But it's possible that we will see our recent experience reversed: that businesses will respond to the relative shortage of labour by investing in more machinery, thus raising productivity. In other words, it's possible the problem will fix itself.
Still, I wouldn't want to bet the farm on it. Drummond figures governments have put in place about 70 per cent of the reforms he would advise. Rather than casting about for entirely new prescriptions, how about we get cracking on the 30 per cent that remain?

Loblaw to increase focus on new Canadians and online sales as Target enters market

The president of Loblaw Cos. Ltd. is vowing to put a renewed focus on the customer as the grocery chain gets ready to do battle against U.S. discount juggernaut Target Corp.
“It’s about bringing more customers into our stores,” Vicente Trius told analysts during a conference call Tuesday.
Loblaw lost some competitive momentum in late 2010 and early 2011, executives said, but the company been working hard to regain that ground, and has recently seen increased customer counts.
“It doesn’t happen overnight. It’s about building a more solid customer proposition,’ Trius said. “This is about bringing better service to build our business. I like the traction that I see.”
Trius said the chain also plans to add more ethnic fare, introduce a new loyalty card in 2013 and sell Joe Fresh merchandise online.
Trius and other executives assured analysts and investors that a years-long overhaul of the grocery store operator’s supply chain is finally paying off, with almost 99 per cent of the grocery store operator’s products available on the shelves for customers.
“Product availability is 98.8 per cent,” Trius said. “The product is there.”
Loblaw has said it’s still not done with the overhaul. It will spend $70 million this year to bolster its information technology and supply chain and $40 million to continue developing its marketing efforts.
The Toronto company doesn’t expect profits from operations to be able to cover the expenses it will book in 2012 and as a result expects net earnings per share to be down year-over-year, with more pressure in the first half of the year.
That supply chain overhaul will be crucial as Target launches its first stores in Canada next spring, analysts say.
“The food and grocery sector in Canada is already pretty darn tight with the incumbents and Wal-Mart expanding,” said Ed Strapagiel, executive vice president of KubasPrimedia, a retail consulting and research firm.
Last year was difficult for supermarkets and food stores across Canada. Sales were up just 0.4 per cent for the industry sector.
Budget-conscious consumers traded down to cheaper brands rather than spending on premium names. They also used more coupons to reduce their grocery bills.
“It’s pretty challenging all around in the food business,” Strapagiel said.
Trius talked about the importance of customer connection, the supply chain, and getting fresh offerings to the shelves.
“Fresh is about the quality, it’s about the experience, it’s about what really brings the loyalty. It’s about how you source, how fast you deliver at the right speed to ensure freshness. We call it field-to-fork. Sometimes I call it field-to-stomach.”
The grocery chain, which operates across Canada under numerous banners including Loblaw, Real Canadian Superstore, Zehrs, Provigo, No Frills and Atlantic Superstore, launched the revamp in 2007 in an attempt to resolve supply difficulties that had resulted in stock not reaching stores efficiently.
Loblaw wants to lead in offering products to new Canadians, Trius said, adding that $1 out of every $3 going forward will be spent by new Canadians.
“This is a country that’s a mosaic and this is a huge opportunity when I look at the market. What an opportunity with new Canadians and what an opportunity with all Canadians,” he said.
He also said Loblaw wants to build on its success of the Joe Fresh clothing brand in other categories such as children’s goods, home essentials and beauty products.
Loblaw will grow by adding more square feet yearly but also by looking opportunities for smaller stores as more Canadians opt for condominiums, he said.
Loblaw also wants to grow e-commerce through its Joe Fresh brand by 2013 and have a “best-in-class loyalty card.”
“I want to know our customers better. I want to be able to communicate to them better.”