A new Op-Ed by the Conference Board of Canada, a non-partisan Canadian economic think tank, makes the case that Canada’s tepid productivity growth over the last three decades is due to an insufficient expansion of physical capital.

The report lauds the quality of Canada’s labour force:

Canada can boast one of the top workforces in the world. Compared with many other developed countries, Canada has a very high proportion of college- and university-educated workers in the labour force. Only Finland surpassed Canada in the Conference Board’s How Canada Performs analysis in Education and Skills– our best showing across six socio-economic categories.

And argues that Canada’s workers, while well-educated and capable, have not been given the “machinery and equipment, technology, and infrastructure” needed to maximize their productivity.

It notes that the ratio of physical capital to human capital decreased dramatically from the mid 1980s onward, and this corresponded with a slow down in productivity growth -from 2.8 percent per year in the 1962 to 1984 period, to just 1.2 percent per year in the 1984 to 2010 period.

The report gives several reasons for the decrease in investment in physical capital:

• A weakening Canadian dollar in the 1990s and early 2000s, which made foreign-made capital equipment more expensive for Canadian companies
• The introduction of the capital tax, a tax on the value of a company’s taxable capital, in 1985
• Trade barriers like tariffs between Canada and other countries
• Insufficient investment in Canada’s public infrastructure
• A weak venture capital market which has prevented a greater number of successful firms from being launched in Canada

The authors note that there have been improvements in all of these areas in recent years, with a stronger Canadian dollar since 2003, the elimination of the capital tax in 2006, large investments by the federal government into infrastructure projects since 1999, the elimination of tariffs on machinery and equipment in 2009, and recent inter-provincial agreements to reduce domestic trade barriers, like the TILMA between BC and Alberta.

They say these improvements have resulted in strong growth in capital investment since 2005, including a 25 percent increase in the last two years.

The report recommends more work to develop the venture capital market, improve advanced education, and reduce trade barriers, as well as increasing infrastructure investment, to enhance future productivity.