The best way to reduce poverty in the future is to promote economic growth. And the only way an economy can grow (besides going to war and stealing stuff) is via technological change or via saving and investment. It is the last of these -- saving and investment -- which is a cause for some concern in western economies, especially Canada. This point is made quite strongly by a recent C.D. Howe study:
Canada is a laggard compared to other Western countries when it comes to business investment per worker, a bellwether measure of future prosperity for Canadians, according to a study released today by the C.D. Howe Institute. This underperformance is troubling since providing workers with state-of-the-art tools and equipment helps preserve their competitive edge, raises incomes and reduces environmental stress, says the report, “New Tools for a Richer, Greener Future: Why Canadian Workers Need More Robust Business Investment.”
Authors Robin Banerjee, Policy Analyst, and William B.P. Robson, President and CEO at the Institute, compare Canada’s performance with other members of the G7 and the OECD as well as with the United States. Over the past decade, they write, business-sector capital formation in Canada has been consistently below the average for the G7, and is forecast to underperform the average for other OECD countries over 2008 and 2009.
Even in the face of economic weakness and credit market turmoil in the United States, Canada is not closing the gap with its southern neighbour, they add. Their findings: While the average Canadian worker can expect about $11,100 in new capital investment in 2008, rising to $11,400 in 2009, the average OECD worker will likely get about $11,600, rising to $11,800 in 2009. The average worker in the larger developed countries of the G7 will see $11,800 of capital investment in 2008, rising to $11,900 in 2009.
In the United States, our closest neighbour and trading partner, the average worker should enjoy about $12,500 of investment in both 2008 and 2009. They argue that Canada’s failure to improve its standing against other developed countries, despite a healthy economy and robust saving, underscores the need for tax and regulatory policies that would spur private investment.
Quite clearly there is no necessary production function relationship between investment per worker and the capital/labour ratio. However, continuing low investment per worker ratios will inevitably lead to lower capital/labour ratios and possibly slower future growth rates.
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