One-dimensional? Us?

Two University of Calgary researchers have crunched the numbers and found Canada’s economy to be a model of healthy diversification. But not everyone is convinced
By Ian McGugan

Look again: While conventional thinking holds that Canada’s economy is overly dependent on just a couple of sectors, it might not be the case

For years, politicians and policy wonks have urged Ottawa to take action to ensure that Canadians become more than hewers of wood and drawers of water. But maybe it’s time to think again. Trevor Tombe and Robert Mansell of the University of Calgary recently wrote a paper that offers a striking new perspective on this old crusade. Their argument—which I’m stating in its baldest, bluntest form—amounts to saying that Canada doesn’t need any pointy-headed bureaucrats to encourage diversification, because it’s plenty diversified enough already, thank you very much.

If this finding surprises you, join the club. Public opinion surveys usually find that Canadians favour action to diversify the national economy. It’s easy to understand. The Toronto Stock Exchange is increasingly dominated by only a couple of sectors—financial services and energy. There are broad swathes of capitalistic endeavour where it’s difficult to think of any sizeable Canadian contender. In sectors such as packaged goods, retailing, technology and most manufacturing, this nation nearly always looks to foreigners for leadership.

So is this apparent lack of diversity a problem? Maybe not, if you view the world in the same way as Tombe and Mansell. I don’t share their perspective, but before I get to my reservations, let me first congratulate the two economists for helping to clarify some of the key issues around economic diversity.

One of their achievements is reminding us that much of the popular worry about Canada becoming a petro-economy is simply nonsense. Truth be told, the resource sector, broadly defined, accounts for only about one in 50 Canadian workers and the percentage of the workforce it employs has been shrinking, not growing. The much less glamorous category that Statistics Canada refers to as “accommodation and food services” employs more than three times as many people.

Also to their credit, Tombe and Mansell have advanced the debate by actually attempting to measure the extent of diversity in the Canadian economy. They do this by calculating what are known as Herfindahl indexes for various measures of economic activity. (For those keeping score at home: You begin the Herfindahl process by measuring what percentage of the economy each sector generates. You then square each of those individual sector figures. Finally, you add up all the squared numbers. The higher the resulting total, the higher the degree of economic concentration, which is to say the lower the level of diversity.)

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Tombe and Mansell crunch the numbers several ways and find that Herfindahl indexes suggest the Canadian economy is just as diversified, if not more so, than it was in the 1970s, when measured in terms of income or employment (see chart).

Surprisingly, the researchers find that Canada actually stacks up strongly against other countries in terms of diversity. According to the Herfindahl scorecard, Canada is more diversified than the U.S., Germany or Japan. “Based on these measures, the view that the Canadian economy is narrow and overly dependent on just a few sectors does not appear valid,” Tombe and Mansell write. “The results provide important perspective that weakens the case, often heard in political circles, about the urgency of broadening the national economy.”

Well, maybe. To my way of thinking of thinking, the results also demonstrate the limits of the Herfindahl approach. One issue is that the score you get is very sensitive to how you define sectors. Furthermore, the scores don’t seem to align with any perception I’ve ever encountered. Is the United States really a far less diversified economy than Hungary or Poland? Do Alberta and Saskatchewan truly lead Canada in terms of employment diversity? Those are just some of the conclusions reached by Tombe and Mansell.

Part of the problem may be how to define diversity. One simple indicator is to count how many globally significant companies a country can muster across how many different sectors. Sweden, to cite one example, can boast several enterprises in entirely unrelated industries that are recognized around the world—Ericsson, Volvo, H&M, to name three. Switzerland (Nestle, Novartis, Glencore) and the Netherlands (Royal Dutch Shell, ING, Unilever) can easily make similar claims. Canada, despite a much bigger population, would have a difficult time mustering a list anywhere near as impressive or as sprawling.

Why doesn’t Canada house more global heavyweights? Why aren’t we generating more world-beaters? To my mind, these are key questions that highlight real problems.

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Those of us who worry about a lack of diversity in the Canadian economy do so not because we value diversity for its own sake, but because we’re concerned that the country is relying too much upon safe, predictable industries and thus not achieving as much in the way of prosperity as it could. Canada’s lack of global giants seems to suggest that this worry is founded in reality.

So what should be done? Nobody wants to go back to the bad old days of supporting national champions simply for the sake of patriotic pride. As you might expect, Tombe and Mansell argue strongly against any government attempt to pick winners and suggest the market should be left to its own devices. That is good advice, the type of counsel that warms the hearts of neoclassical economists everywhere, especially ones that teach in the heart of the oil patch.

But here’s the thing: Canada has largely left the market to its own devices in recent decades, yet we have yet to see any surge in entrepreneurship or any notable upwelling in globally significant firms. I, for one, remain worried about our lack of diversity. And I’m not yet prepared to rule out government as part of the solution. Maybe its role should be in funding education and research centres rather than directly bankrolling companies, but something is missing in the current environment and we should keep searching until we identify it.

Ian McGugan is an award-winning business journalist in Toronto and the founding editor of MoneySense magazine. E-mail:

Photography: Chris Helgen/Reuters

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