Productivity Growth in Canadian and U.S. Regulated Industries

Article excerpt

THE EVIDENCE SHOWS THAT many of the Canadian industries that underwent deregulation experienced faster labour productivity growth and multifactor productivity growth than did the aggregate Canadian business sector and had similar or higher productivity growth than did their counterparts in the United States over the 1977-2006 period. These industries include rail transportation, motion pictures and sound recording, financial intermediation and insurance carriers. The broadcasting and telecommunications industry had similar productivity growth in the two countries before 2001, and after 2001 it had much slower productivity growth in Canada. The airline industry and the publishing and information services industries had slower productivity growth in Canada than in the United States over the 1977-to-2006 period.

Recent research for OECD countries suggests that productivity growth is boosted by reforms that promote better corporate governance and competition (Nicoletti and Scarpetta, 2003). Regulation is seen to create barriers to entry, reduce the incentives to innovate and invest, all of which lead to slower technological progress and slower productivity growth (Crafts, 2006; Conway and Nicoletti, 2007).

Similarly, in a series of cross country case studies, the McKinsey Institute identified regulation and a lack of competition as factors behind low productivity growth in many countries (Kellison, 2004). Many of the McKinsey studies focused on restrictions on foreign investment, traditional utility type regulation, and urban planning restrictions that reduced retail and wholesale competition.

Since a number of studies have found that regulation and barriers to competition hinder productivity growth (though they may have beneficial effects in other areas), the focus of this article is the productivity performance of the 'regulated' infrastructure sector in Canada.

The industries that are examined encompass transportation services, including rail and air; broadcasting and telecommunications; and financial services, including financial intermediation and insurance. These industries provide the foundational networks on which other industries rely. They are also industries that have traditionally faced regulation in terms of the pricing of products, the supply of industry outputs, and restrictions on foreign ownership. In recent years, they have undergone varying degrees of deregulation and experienced increases in competition.

Productivity is important but it is just one of many indicators that analysts use to judge the performance of an economy. Productivity is a measure of the efficiency with which resources are turned into output. Growth in labour productivity is closely associated with growth in GDP per capita and with increases in real wages (Baldwin and Gu, 2007c). Other aspects of an economy-the safety of the products produced, the volatility of the economic system, and the fairness of the distribution of income-require other indicators if one is to fully assess the many factors, in addition to productivity, that together affect an economy's overall health. (2)

Canada has sector-specific legislation and/ or policies on foreign investment in telecommunications, broadcasting, cultural industries, and transportation services. The financial services sector is subject to owner ship restrictions, but not specific foreign-ownership restrictions. According to the Organisation for Economic Co-operation and Development (OECD), Canada has the second greatest restrictions on foreign direct investment in the OECD countries (Maher and Shaffer, 2005). The regulations are generally more restrictive in Canada than in the United States in non-manufacturing industries, including air transportation and telecommunications (Conway and Nicoletti, 2006).

These sectors were quite heavily regulated in Canada at the beginning of the period of study (1977), experienced deregulation at different times during the period, but still faced various types of regulation at the end (2006). …