The Growth Story: Canada’s Long-run Economic Performance and Prospects

3 C anada’s economy turned a corner in the 1990s. What happened? Most Canadians would give a lot of credit to the dramatic about face on the deficit in middecade. We finally began to live within our means; made room for taxes to be cut; and came to rely less on bureaucrats and more on entrepreneurs. Those who follow these issues more closely would also point to the Bank of Canada’s successful war on inflation, culminating with the “cleansing” recession that ushered in the 1990s. Credit would also be due to the substantial liberalization of trade following implementation of the Canada-U.S. Free Trade Agreement (FTA) in 1989, and subsequently the North American Free Trade Agreement (NAFTA). Those less disposed to accord much credit to policy would simply point out that a rising tide lifts all boats. That rising tide included exceptionally favourable global macroeconomic circumstances; the investment boom triggered (irrationally or not) by the promise of information and communications technologies; and the extraordinary dynamism of the United States, from which Canada benefits more than any other country. All combined to make strong Canadian growth inevitable. True enough. But many of Canada’s peers in the club of advanced economies — essentially the member countries of the Organization of Economic Cooperation and Development (OECD) — have not fared nearly as well. And taking a closer look at several factors that are believed to be key drivers of long-term economic growth — e.g. investment in physical and human capital; innovation; the state of domestic competition; performance of financial markets; flexibility of labour markets; strength of entrepreneurial behaviour — one sees that Canada has become, in most respects, well-positioned to sustain the momentum established in the mid1990s. The objective of this essay is to outline the case for this conclusion. No original research is reported. The perspective is policy-oriented, rather than academic. While we draw on many sources — a number of which have appeared in the pages of the International Productivity Monitor — the foundation reference is the work of the OECD’s Growth Project launched at the request of member governments in 1999. Specifically, we draw heavily on a recently published compendium of the work to date — The Sources of Economic Growth in OECD Countries (OECD, 2003a). That report is reviewed by Martin N. Baily The Growth Story: Canada’s Long-run Economic Performance and Prospects