Regional Productivity and Income Convergence in Canada under Increasing Economic Integration

Article excerpt

Regional disparities in such factors as wages and incomes have long been a concern of developed and developing countries. The concern has emanated from both equity and efficiency considerations. Equity issues arise if the gains from being part of a country appear to be unfairly divided, and especially if some parts of the country appear to be permanently falling behind and bypassed by economic progress. Efficiency issues arise because disparities can be a sign that resources are not being allocated efficiently. Sustained differences in wages that reflect differences in productivity, for example, can mean that labour is not being reallocated from where its productivity is low to where it is high. Sustained differences in unemployment rates can mean that labour is not being reallocated from areas where it is under utilized to where it is more fully utilized. (1)

Equity and efficiency pertaining to regional inequalities are also interrelated. Lack of social access to the gains of being part of a country can lead to political and social instability that can result in efficiency costs. In such circumstances, resources have to be devoted to restore stability, property rights can become ill-defined, and capital may be reluctant to enter given the investment uncertainty. As well, if transfer payments have to be instituted to ensure a degree of equity, these can blunt the market signals that serve to reallocate resources to their most valued uses. Furthermore, the taxes needed to raise the revenues for the transfers can create distortions that also have efficiency costs. Once taxes and transfers become a significant part of the landscape, real resources get devoted to rent seeking activities to obtain the transfers and avoid the taxes. Clearly, issues of equity and efficiency are inextricably entwined.

The purpose of this paper is to analyze regional convergence of productivity, wages and incomes in Canada. The Canadian case is of interest for a variety of reasons. It is a country characterized by considerable regional disparities that have led to important social policy responses. In fact, the first annual review of the Economic Council of Canada (1964) asserted that one of the economic goals of the country was an equitable distribution of rising incomes. Of particular note, the equitable distribution referred to regional income and not necessarily personal income distribution. Inequalities between regions appeared to be more important than inequalities of the personal distribution of income within a region. (2)

Being a geographically large country with substantial heterogeneity in resource endowments and accesses to markets, regional issues have always been important in Canada. These have been compounded by the fact that while natural trade and communication lines run North-South, Confederation and the 49th parallel have shifted trade, communication and transportation in the East-West direction. Greater economic inter-dependence within the Western Hemisphere will test the viability of the East-West regional links. The issue is compounded further by the special case of Quebec, with its distinct language, culture and legal system, and the possibility of its separation from Canada. These issues have given greater impetus to regional alliances within different parts of Canada: the Atlantic provinces (especially to mitigate the effects of being isolated from the rest of Canada if Quebec separates); Quebec with its "distinct society"; Ontario (with its industrial and financial base); the Prairies and Western provinces with their agriculture and resource base; and British Columbia (with its orientation to the Pacific Rim). Such regional issues are of increased importance given the fact that greater economic interdependence is giving rise to a focus on the region as opposed to the country as the appropriate unit of analyses (Courchene 1985).

Policy responses in Canada have always had an important -- and often controversial -- regional dimension. …