Lack of Competition Hinders Provincial Economy

By Peter Lindfield, published in the Telegraph-Journal 22nd June 2012

Conventional wisdom blames New Brunswick’s underperformance on the limited educational attainment and low skill level of its workforce. They are the scale penalties of operating in a relatively small market and the capital market pressures that make companies reluctant to invest in long-term productivity-enhancing technologies.

Undoubtedly, these factors play a role, but the real cause of New Brunswick’s low productivity can be traced to the lack of competition and innovation in product markets.

Competition is the key mechanism that assists more productive and efficient companies to expand and take market share from less productive ones, which then either exit the business or become more efficient. Consumers benefit from this dynamic because companies offer better products at lower prices.

What can be done to encourage companies to improve their productivity and competitiveness? There are a number of key ways that the provincial government can help close the output gap and assist New Brunswick against the coming demographic tempest. Without intense competition, all other strategies, policies and measures are ineffective.

But first, there must exist a consensus about New Brunswick’s defining industries. This means placing a spotlight on where New Brunswick firms possess or can possess a competitive advantage.

The provincial government has already announced that it intends to focus its support on a number of key strategic industries. Additional inputs from sector associations and other industry groups need to coalesce around these industries. A challenge for government will be that support for industries will not necessarily mean support for every firm in those industries. In addition, government subsidies, inducements and other investments may still apply to other industries.

Second, government should negotiate reforms to harmonize tariff and non-tariff barriers as well as rationalizing regulations and standards within Canada and the United States. Larger markets could assist smaller New Brunswick companies to become more competitive. Sufficient scale and the presence of competitive markets are needed for the unleashing of Joseph Schumpeter’s forces of creative destruction and entrepreneurial innovation.

The key goals of economic deregulation should be to simplify markets and encourage competition. While some regulations were put in place for legitimate reasons, their current economic cost is frequently overlooked. Similar social or economic objectives can often be achieved at significantly lower cost by using targeted fiscal-based policies instead of market-distorting regulations.

Third, government reform will mean managing government expenditures in health care, education and social transfers, coupled with changing the way government delivers services to the public.

The debt and deficit are clear targets for reductions, but some of the resources that are currently tied up in traditional government consumption must be redirected to New Brunswick’s future. Improvements in post-secondary education will be critical to underpinning socially inclusive growth. A greater integration of technical, business and industry training into post-secondary school programs will make valuable contributions to innovation and the improvement of students’ skills.

The coming demographic shift will place greater pressures on taxpayers to support the increasing future costs of health care, education and pensions. More ominously, a steepening fiscal cliff is placing greater pressure to find solutions to New Brunswick’s growing economic challenges. In the absence of the unexpected, such as longer working hours or greater immigration, the only way to improve living conditions in New Brunswick will be either to drive productivity improvements as quickly as possible or to raise taxes to unprecedented levels.

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Filed under New Brunswick, Productivity

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