Crawl Across the Ocean

Monday, November 28, 2005

Rorschach Watch

Following up on my previous post, there were some more people projecting their own reasons onto the gap between Canadian and American productivity in the Globe today:

"A recent study by two top economists, Melvyn Fuss from the University of Toronto and Leonard Waverman, chair of economics at the London Business School, concluded that ICT can account for about 60 per cent of the huge and widening labour productivity gap between Canada and the United States.

Their study measured simple investment in ICT, but it went a step further than most studies by quantifying the spillover effects of ICT on productivity in companies. In essence, they attempted to measure the effects of networks, and not just quantities of hardware and software.

Specifically, the researchers look at the number of personal computers in use in the United States compared with Canada, as a proxy for diffusion of ICT. They find that households in Canada actually have more computers per capita than in the United States. Canadian small businesses have fewer computers per capita, but just marginally.

Medium-sized and large businesses, on the other hand, as well as education and government in Canada are far, far behind.

"There is significantly lower accumulation of ICT by medium and large firms, education and government in Canada," the study notes.

"The major difference in the stock of PCs in Canada used by medium and large corporations compared to U.S. firms may signal reluctance in Canada by managers to embrace completely the new economy and the significant changes it requires."

I can think of about 10 problems with this hypothesis off the top of my head, but here's the good news, column writer Heather Scoffield actually went out and did some research to get some balancing (and insightful) views so I don't have to make the effort.

"Andrew Sharpe, one of Canada's top experts on productivity, agrees with the two professors that ICT is at the root of much of the productivity gap with the United States. His own research shows that large corporations in Canada lag the United States in terms of investing in ICT.

Still, he is doubtful about drawing the conclusion that more than half the productivity gap can be explained away by the ICT factor. Given that PCs are quite cheap these days, any large company that needed one would already have one, he reasons.

"Intuitively it doesn't make sense," he said of the Fuss and Waverman conclusions.

Plus, the professors' paper focuses on the big gap between Canada and the United States, and does not shed much light on why, the United States aside, there has been essentially no productivity growth in Canada whatsoever for the past two years.

Mr. Sharpe, who is the executive-director of the Centre for the Study of Living Standards based in Ottawa, believes the most recent productivity stagnation is mainly because of Canada's natural resources.

Because commodity prices have been high, he argues, resource firms have had incentive to extract commodities that would be marginal with lower prices. While the extraction is still profitable, it drives down the national productivity numbers. (Productivity is usually defined as output per amount worked).

Still, Mr. Sharpe said he is generally sympathetic to the Fuss and Waverman argument that ICT is a main reason for Canada's poor productivity performance.

"Even if ICT is not the major cause, it may be part of the solution," he said.

Scoffield keeps digging...

"And the Fuss and Waverman paper hits a big brick wall when it comes to the country's statistics authority. John Baldwin, director of micro-economic analysis at Statistics Canada, says he thinks the study distorts the ICT problem in Canada.

"There are so many things that determine how productive a company is. I'd be surprised if there were a holy grail," he said. "The best firms are implementing ICT into their operations faster than other firms. But the best firms are doing a lot of things better than other firms."

Mr. Baldwin also has issues with the methodology used in the Fuss and Waverman paper, and he thinks they handicapped Canada by not considering that high-technology is embedded into many different types of equipment these days, not just computers.

Canada, he also points out, has a much different economy than the United States. Because Canada is a resource-based economy, much corporate profit is invested in infrastructure -- pipelines, dams, engineering structures -- rather than the machinery and equipment that U.S. profits favour.

Plus, Mr. Baldwin adds, since Canada has experienced a huge growth in its labour market over the past two years, the country's wealth per person has remained unchanged when compared with the United States, at about 80 per cent."

Personally, I'm inclined to side with Baldwin and Sharpe over Fuss and Waverman. Waverman shows his preference for words over reality with his quote that closes the column,
"Raising productivity is not about shedding jobs, but enabling labour to have the modern tools and the organizational structure to compete at world levels."

Of course if your labour force has the tools and structure to compete at world levels, this is just business speak for meaning that they each employee can get a lot done, and when each employee can get a lot done, you don't need as many of them (or you hire more because you've driven your less productive rivals out of business) and we're back to shedding jobs.

Anyway, while it's common to see people carelessly projecting their own opinions onto the productivity question, it's rare to find a well researched article which presents a balanced perspective on this complicated topic. Well done.


For some more technical details on some of the problems with the Fuss and Waverman paper, see this submission to the government's telecom policy review by the Canadian Cable Telecommunications Association (true, this is a lobby group, but their criticism of the paper (starting on page 4) seems pretty reasonable to me).


I couldn't find a link to the Fuss and Waverman study in question. It sure would be nice if the mainstream media would start linking to documents they write columns about in their online versions.


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