- [Narrator] This is Canada,
the second largest country in the world
and one of the most interesting economies
that we can research today
because of the problems it is facing.
On the surface,
Canada might just look like any other advanced economy.
It has a relatively high standard of living,
high incomes, advanced industries,
and an advanced financial system
to keep the whole thing going.
But beneath the surface,
Canada is plagued with a range of macroeconomic issues
that have led many economists
and even the OECD to believe
that it will be the worst performing advanced economy
in the coming decades.
Now, these are some big claims,
and I have to say, as always,
nobody can predict the future, least of all economists,
but that doesn't mean the concerns
that these organizations have raised are not genuine.
At the very least,
they can teach us a lot about the challenges
that we will face in our own economies
because while Canada might be
the hardest hit by these issues,
everybody else will by no means be immune.
And yes, that includes their neighbors to the south.
So, why is Canada projected to be the slowest growing
advanced economy for the next five decades?
Will these issues impact all of our economies?
And is there anything that can be done to fix these problems
before they start to seriously impact
the citizens of Canada?
Once we've looked at all of that,
we can put Canada
on the Economics Explained National Leaderboard.
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Canada is both blessed and cursed by its regional position.
It is blessed because of its proximity
and cultural closeness to the largest economy in the world.
A connection which has made it the United States'
largest trading partner.
It has also got access to
both the Pacific and Atlantic Ocean
for even more international trade opportunities,
all while being very protected
in a nice, peaceful part of the world.
Unfortunately, its position also means
that most of its land mass is uninhabited tundra
and its population is highly concentrated
in just a few urban centers close to the southern border
and close to that much larger
and much more dominant economy.
Now, geography is not the reason that Canada is in trouble,
but it could make a lot of its problems worse.
So, remember this for later on.
The real problem is that Canadians just don't make as much
as their American peers.
I mean this in the sense
that average salaries in Canada are lower,
but also, the average Canadian
just does not make as much stuff as the average American.
Part of this gap is pretty easy to explain.
Americans just work more hours than Canadians,
so, they have more time to produce more value
for their economy.
But even adjusted for working time,
Americans are on average
more than 30% more productive than Canadians.
The average American worker
produces $66 worth of value per hour,
whereas the average Canadian only produces
$50 worth of value per hour.
So, why is this?
Too many of those workers' rights?
Too many poutine breaks?
Such a large gap is actually quite hard to explain.
A lot of economists assume that this gap was caused
by the different industry makeups of the US and Canada.
America just has more high-income industry centers
that pushes the national average up.
For example, there is no real Canadian equivalent
of Wall Street or Silicon Valley.
If this explanation was correct,
it would also mean
that this difference is pretty much meaningless
because a few standout value-adders
pulling up the national average
isn't really giving much insight into the experience
of most participants in the economy.
The OECD has since found out
that even on a per-industry basis,
Canada still falls behind the US in terms of productivity.
So, the high-performing industry excuse
doesn't really hold up.
The real reason is that the US just invests a lot more
into making their workers more productive.
To produce anything, we need the factors of production,
land, labor, and capital.
You can make your labor more productive
by making your population younger,
better educated, and healthier.
Land is more productive if it's close to water reserves
or rich in natural materials.
And capital,
which is simply things like machinery or infrastructure,
becomes more valuable the more that is invested into it.
It's also important to consider that improving
any of these factors will have positive impacts
on the other two factors.
For example,
if a country finds a better way to manage its farmland,
it can support a higher population of younger workers.
If it has a bigger population,
there'll be more people to make more innovations
to improve capital.
And capital is instrumental in making land
and workers more productive.
An accountant with a computer running Microsoft Excel
can do the work of two accountants using calculators
and five accountants using their heads.
A farm with modern irrigation systems,
genetically enhanced crops, and modern fertilizers
is going to produce much more food on the same acre of land
when compared to a farm without these capital advancements.
Computers, calculators, fertilizers, and irrigation systems
are all what economists consider capital.
A more simple definition is just stuff that makes stuff.
Capital investments make both land and labor more efficient
and this is what Canada is lacking
when compared to the United States.
As of 2019, Canadian businesses spend $13,000
per worker per year on capital.
Again, this could be anything
from office chairs to state-of-the-art machines.
The US by contrast,
spent $20,500 per worker
or 50% more than Canadian businesses did.
A lot of this is down to financing infrastructure.
The US is a hotbed of business investment
thanks in large part to its public markets
that attract both American and international investors.
Canada, of course, has its own public stock exchanges
but they are not nearly as large
and don't attract the same type of international investment.
Obviously, this is anecdotal,
but I personally as an individual investor
have roughly 1/3 of my total portfolio
invested into US companies despite living in Australia
because the US is just a logical place to invest.
It uses the world's reserve currency,
it has a very favorable business environment,
and it's just so large that it becomes the default choice.
This has trickle-down consequences
for even non-publicly traded companies in the country.
For example, take Bob and Marshall here.
Bob owns a construction company in the US
and Marshall owns a construction company in Canada.
Both of these company owners want to raise a million dollars
to buy a new warehouse for their equipment,
so, they start looking for investors.
The American company is much more likely to find it
because there is simply more investment capital
floating around in America.
An initial public offering or IPO
is when a company's shares are first listed
on a public market.
A lot of the time the money raised in these offerings
is not actually going to fund anything the company does,
but instead, it is going to pay back early investors
so that they can take their money
and reinvest it into more new businesses.
This happens on the Nasdaq and the New York Stock Exchange
the same as it does on the Toronto Stock Exchange.
The difference is that the American markets
are proportionately much larger,
and therefore, there is more liquidity available
for businesses of all sizes.
Given this difference in capital investment
between Canada and the US,
it's actually remarkable that Canadian workers
are able to produce as much as they currently are.
But of course, the relationship between labor efficiency
and capital intensity is not exactly linear.
Eventually, a worker is gonna have all the tools
they need to do their job
and anything else is gonna have diminishing returns.
So, why does this actually matter?
Most countries in the world
have less productive workers than the US.
Why isn't it a problem for them?
This productivity issue is such a problem for Canada
really because of the silent rivalry it has with the US.
For a video about the economy of Canada,
I have spoken a lot about the United States
and I have done this for two reasons.
The first is that most of my audience is American,
and they tend to lose interest
if they're not mentioned every few minutes.
But more importantly,
Canada has a true economic rivalry with the US.
To be clear, Canada and the US are allies.
They have very open trade policies,
and of course, they are culturally extremely close.
But all of this just makes the battle for talent
that much more fierce.
About 45,000 Canadians move to the United States every year.
But despite the constant posts on social media
threatening to do as much,
only around 9,000 Americans move to Canada.
This is simply a decision that most make
based on opportunity.
We have already seen that American workers
earn more on average,
and this is especially true for highly-skilled individuals
with equally high salaries.
Top income earners in Canada can make much more money
by moving to the US,
and they'll also be paying much less tax on that income.
Yes, social security is not as strong in America
but that doesn't matter very much to high-income earners.
This brain drain means that Canada consistently suffers
from a talent shortage
which it has had to fill with skilled migrants.
Now, skilled migration can be a great thing
but there are some side effects.
Housing affordability being one of the big ones,
especially in Canada,
because remember, while it's a big country,
most people live in a small handful of metropolitan cities.
This growth in house prices has been a problem
for Canadian cities for the past two decades,
but it's becoming especially apparent now.
Higher land prices also further starve businesses of money
that they could be investing into capital.
If a business spends more money renting
or buying its facilities,
it's not gonna have as much to spend on staff wages
and the tools it needs to add value to the economy.
It's also gonna make it harder
for those businesses to raise money
because investors and banks are going to be more drawn
to the real estate market
rather than the business financing market.
Ironically, this housing affordability issue
is only exacerbating the problem of skilled Canadians
looking to move out of the country to American cities
where they can earn more and pay a lot less.
Now it's time to put Canada
on the Economics Explained National Leaderboard.
Canada is the eighth largest economy in the world,
with a GDP of $1.64 trillion.
So, despite all of the mean stuff I've said in this video,
it's still a very heavy hitter and it gets an 8 out of 10.
That strong GDP is spread out
over a relatively modest population of 38 million people,
giving it a GDP per capita of $43,258
and an 8 out of 10.
Stability and confidence is great.
Part of the reason
that Canada has such expensive real estate
is that wealthy people from across the world
see it as a safe haven to invest their money.
It has a strong and stable democratic government
and an overall well managed economy.
It gets a 9 out of 10.
Growth has not been strong,
and according to the OECD's predictions,
it's not gonna improve anytime soon.
Canada has really not seen any nominal GDP growth at all
in the past decade, so, it gets a 2 out of 10.
Finally, industry.
Canada does have robust service,
financial, mining, and agricultural industries,
and while it might be overshadowed on all fronts
by its big brother to the south,
it's still no slouch on the world stage.
It gets a 7 out of 10.
Altogether, this gives Canada an average score
of 6.8 out of 10,
putting it here
on the Economics Explained National Leaderboard.
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Thanks for watching, mate. Bye.