AR 12 AR 12 Chairman CoRRECTion

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TwelfthAnnualReportNovember2013AR 12 course correction: charting a new road map for ontarioAR 12CoursecorrectionCharting a new road mapfor OntarioTask Force on Competitiveness, Productivityand Economic ProgressChairmanRoger L. MartinMartin Prosperity Institute,Rotman School of ManagementMembersJohn ArmstrongThe Capital Markets CompanyCompany (CAPCO)Timothy D. DattelsTPG CapitalLisa de WildeTVOntarioDavid FolkJefferson PartnersSuzanne FortierMcGill UniversityGordon J. HomerGordon J. Homer Advisory ServicesP. Thomas JenkinsOpenTextDavid KeddieNational Compressed AirL. Jacques Ménard, O.C.BMO Nesbitt BurnsMark MullinsVeras Inc.Timothy H. PennerTask Force on Competitiveness, Productivityand Economic ProgressISBN: 978-1-927065-08-2Task Force on Competitiveness, Productivityand Economic ProgressDaniel TreflerUniversity of TorontoThe Task Force on Competitiveness, Productivity and Economic Progress wasannounced in the April 2001 Speech from the Throne. Its mandate is to measureand monitor Ontario’s competitiveness, productivity, and economic progresscompared to other provinces and US states. In the 2004 Budget, the Governmentasked the Task Force to incorporate innovation and commercialization issues intoits mandate. The Task Force reports directly to the public.It is the aspiration of the Task Force to have a significant influence in increasingOntario’s competitiveness, productivity, and capacity for innovation. This, webelieve, will help ensure continued success in the creation of good jobs, increasedprosperity, and a high quality of life for all Ontarians.The Institute for Competitiveness & Prosperity is an independent not-for-profitorganization established in 2001 to serve as the research arm of the Task Force.The Working Papers published by the Institute are primarily intended to informthe work of the Task Force. In addition, they are designed to deepen publicunderstanding of macro and microeconomic factors behind Ontario’s economicprogress and stimulate debate on a range of issues related to competitivenessand prosperity. Ideas are shifted from concept to action by using a method thatdemonstrates value along the way.Comments on this Twelfth Annual Report are encouraged and should be directedto the Institute for Competitiveness & Prosperity. The Task Force and the Instituteare funded by the Government of Ontario through the Ministry of EconomicDevelopment, Trade and Employment.Copyright November 2013The Institute for Competitiveness & ProsperityISBN: 978-1-927065-08-2

TwelfthAnnualReportNovember2013AR 12 course correction: charting a new road map for ontarioAR 12CoursecorrectionCharting a new road mapfor OntarioTask Force on Competitiveness, Productivityand Economic ProgressChairmanRoger L. MartinMartin Prosperity Institute,Rotman School of ManagementMembersJohn ArmstrongThe Capital Markets CompanyCompany (CAPCO)Timothy D. DattelsTPG CapitalLisa de WildeTVOntarioDavid FolkJefferson PartnersSuzanne FortierMcGill UniversityGordon J. HomerGordon J. Homer Advisory ServicesP. Thomas JenkinsOpenTextDavid KeddieNational Compressed AirL. Jacques Ménard, O.C.BMO Nesbitt BurnsMark MullinsVeras Inc.Timothy H. PennerTask Force on Competitiveness, Productivityand Economic ProgressISBN: 978-1-927065-08-2Task Force on Competitiveness, Productivityand Economic ProgressDaniel TreflerUniversity of TorontoThe Task Force on Competitiveness, Productivity and Economic Progress wasannounced in the April 2001 Speech from the Throne. Its mandate is to measureand monitor Ontario’s competitiveness, productivity, and economic progresscompared to other provinces and US states. In the 2004 Budget, the Governmentasked the Task Force to incorporate innovation and commercialization issues intoits mandate. The Task Force reports directly to the public.It is the aspiration of the Task Force to have a significant influence in increasingOntario’s competitiveness, productivity, and capacity for innovation. This, webelieve, will help ensure continued success in the creation of good jobs, increasedprosperity, and a high quality of life for all Ontarians.The Institute for Competitiveness & Prosperity is an independent not-for-profitorganization established in 2001 to serve as the research arm of the Task Force.The Working Papers published by the Institute are primarily intended to informthe work of the Task Force. In addition, they are designed to deepen publicunderstanding of macro and microeconomic factors behind Ontario’s economicprogress and stimulate debate on a range of issues related to competitivenessand prosperity. Ideas are shifted from concept to action by using a method thatdemonstrates value along the way.Comments on this Twelfth Annual Report are encouraged and should be directedto the Institute for Competitiveness & Prosperity. The Task Force and the Instituteare funded by the Government of Ontario through the Ministry of EconomicDevelopment, Trade and Employment.Copyright November 2013The Institute for Competitiveness & ProsperityISBN: 978-1-927065-08-2

ROAD TO PROSPERITY 2020Short-term(1–2 years)AMedium-term(3–5 years)Encouragebenchmarking ofbest businesspractisesLong-term(5 years)MIncrease learningopportunitiesgrants for lowincome individualsIM MM MConvert taxcredits intogrants forpost-secondaryeducationRestore fundingfor scientific &technologyresearchIIMMIISIIS ISImplementfull-daykindergartenAdopt amade in OntarioWITBIncludeinnovation inelementary andhigh schoolcurriculumPhase-out smallbusinessdeductionIncrease co-opand internshipopportunitiesImplementrevenue neutralcarbon taxSupport clusterinitiatives forstrong clustersSet up morepatent officesDevelop regionalplanningstrategiesAlign tuitionrepayment toincome forpost-secondaryCombineOntario Worksand OntarioDisabilityIComplete 3new universitycampusesIImprove linkagesbetweenacademicinstitutions andindustriesUse CETA asplatform forfurther educationinvestment at alllevels in NorthernOntarioInvest in roadsand powergrid in Structures2015201620172018SBuild necessaryinfrastructure forpublic transit2020PROSPERITY2020Scale upinvestment inagri-foodindustries2014ISStandardize coreeducation acrossuniversities20192020

rting a new road mapfor OntarioTask Force on Competitiveness, Productivityand Economic Progress

ExhibitsExhibit 1Exhibit 2Exhibit 3Exhibit 4Exhibit 5Exhibit 6Exhibit 7Exhibit 8Exhibit 9Exhibit 10Exhibit 11Exhibit 12Exhibit 13Exhibit 14Exhibit 15Exhibit 16Exhibit 17Exhibit 18Exhibit 19Exhibit 20Exhibit 21Exhibit 22Exhibit 23Exhibit 24Exhibit 25Exhibit 26Exhibit 27Exhibit 28Ontario’s GDP per capita is above the international peer median Ontario’s GDP per capita ranks lower than the North American peers Ontario’s prosperity gap widened slightly in 2012 The Task Force measures four components of prosperity Lagging productivity and intensity account for most of Ontario’s prosperity gap Ontario continues to have a profile advantage over the North American peer median The intensity gap between Ontario and the North American peer median persists Productivity growth derived from enhancing efficiency and value added in products and services Ontario’s poor productivity performance persists Ontario should still pursue the Prosperity Agenda Skilled trades face lower unemployment than all other occupations Less than half of apprentices complete their programs for most trades Northwestern Ontario is the site of major mining development Northwestern Ontario faces greater economic challenges than the rest of the province Labour productivity growth in Canada’s manufacturing sector is far behind that of the US Labour productivity growth in Canada is low in the non-manufacturing sector The ICT investment gap increased sharply after 1995 High growth in labour productivity matches high growth in US ICT stock Ontario’s communication equipment cluster generates the most patents Ontario’s business enterprises are the most active in patent output in Canada Canada has reduced the METR on investment dramatically compared to other OECD countries Support and pressure drive innovation Manufacturing employment and output growth have decreased more in Ontario than in peer states Ontario has many strong clusters in its CMAs Agriculture value added in Ontario has grown more than in most of its peers Manufacturing value added in food and beverage processing was lower in Ontario than the US peer median Ontario has a widening trade deficit in agri-food Ontario’s agri-food exports have declined for the US, but grown for developing regions 616262Sidebar exhibitsExhibit AExhibit B2Immigration to Ontario has declined, especially among economic class Ontario’s proportion of immigrants from economic categories is below the Canadian average Task Force on Competitiveness, productivity and economic progress7071

ContentsForeword & Acknowledgements 61220244654724Course correction: Charting a new road map for Ontarioontario’s Innovation and productivity conundrumOntario’s prosperity gap persists Raising productivity continues to be the key to closing Ontario’s prosperity gap Achieving the 2020 Prosperity Agenda will be challenging 131518Attitudes: Encourage ambitious actions from Ontario’s business leadersOntario’s business attitudes reflect growing optimism, but hesitant plans 21Investments: Focus on investments that improve future prosperityAll levels of education require investment Promoting skilled trades is a pressing public policy issue Ontario’s North holds great economic potential Investment in ICT is an important component of economic growth Patents are necessary to close the innovation gap 2529333942Motivations: introduce Smart tax policies to boostOntario’s competitivenessTax reductions have dramatically increased Ontario's competitiveness Ontario should introduce a revenue-neutral carbon tax Ontario and Canada have taken important steps to reduce poverty in recent years 475051Structures: Rebalance market structures to aspire to global leadershipManufacturers in Ontario face challenges Strong clusters in Ontario drive prosperity Agricultural and agri-food industries should invest in the tools for growth Canada-EU free trade agreement will benefit Ontario Public transportation is a key component of infrastructure investment 5557606464How can Ontario chart a better course for economic growth?Previous Publications 76Course correction: Charting a new road map for ontario3

Foreword & AcknowledgementsOn behalf of Ontario’s Task Force on Competitiveness, Productivityand Economic Progress, I am pleased to present our Twelfth AnnualReport to the Ontario public. The mandate for the Task Force, and this Report,is to provide government, firms, organizations, and individuals in Ontario withrecommendations for increasing competitiveness and prosperity.This year’s Annual Report takes a look back at how Ontario has progressedin achieving the goals set by the Task Force since its creation in 2001.In evaluating progress, the Task Force has come to terms with a highlydisconcerting finding: Ontario has not moved in the prosperity ranking ofsixteen North American peers. In the latest GDP per capita figures, Ontariosurpasses only Québec and Florida and has grown by just 6 percent in realterms since 2002. This has increased the prosperity gap by more than13 percent from what it was a decade ago. Clearly, Ontario is falling behindits competitors, and it will be a challenge to reach the Task Force’s target ofbeing at the North American peer median by 2020. This story is a result ofmore than a decade of missed opportunities, wasted potential, andcomplacency on the part of business leaders and policymakers to implementthe actions needed to make Ontario more competitive.The global economy has changed substantially over the last decade ago, yetmany of the Task Force’s key recommendations have persisted throughoutthese years. Ontario is simply not doing enough to become more productiveand innovative, as reflected by the province’s low investment levels in researchand development, machinery and equipment, and information andcommunications technology, despite tax incentives and government support.These are core shortcomings the Task Force has highlighted in nearly everyAnnual Report, but other emerging opportunities for growth are not beingseized either. Ontario has a strong agriculture and agri-food sector but it needsto scale up operations and increase exports to the European Union, Asian, andSouth American markets to boost its economic contribution. NorthwesternOntario is on the cusp of one of the biggest Canadian natural resourcedevelopments in a century, but needs significant infrastructure and educationimprovements to be better equipped for economic development.Ontario also needs to enhance its human capital to fulfill its prosperitypotential. Our education system is one of the best in the world, but needs to getbetter at creating school-to-work pathways for students and instilling the skillsgraduates require to become innovative and entrepreneurial economic agents.The Task Force recommends some fundamental improvements to the educationsystem. Ontario needs to create a vocational pedagogy that emphasizescareer-oriented education, alongside core skills in critical thinking,4Task Force on Competitiveness, productivity and economic progress

The Task Force urges the provinceto follow our road map to close theprosperity gap.communication, and problem solving. Educators cannot simply ensure the topstudents or students of certain disciplines excel; they need to create a systemwhere all students have the tools they need to become well-rounded, forwardthinking, and innovative members of society.The Ontario government’s 2013 Fall Economic Statement is commendable forits focus on infrastructure, possible tax reforms, and investments in humancapital. However, rising debt could impact the province’s credit rating andinterest rates. Furthermore, the fractious nature of the political debate in theprovince, and the constant threat of an election, lower optimism that a cleareconomic mission can be pursued. There is always a challenge bringing aboutpositive legislative change in a minority government context, but the Task Forcehopes that the parties can work together to build a brighter future for Ontario.The Task Force, too, must revisit our recommendations and how wecommunicate them. That is why, in this Report, the Task Force has begun tooutline a new road map to close the prosperity gap. Many recommendationswill take years to implement, and the benefits may not be seen for several yearsor even decades. Over the coming year, the Task Force will establish a newtarget and a new plan for Ontario.In the interim, the Task Force encourages the province to follow the road mapthat we have laid out. Too much time has been lost, and many expensive andchallenging actions must be taken. The sooner these initiatives are underway,the sooner Ontario can look forward to a more prosperous future. Throughoutthis Report, the Task Force has highlighted examples of innovation from publicand private sector actors that are already working toward attaining the goalsset out. Paired with our road map visual, this Annual Report provides the mostdynamic and, we hope, influential document yet for how to build a morecompetitive Ontario economy.We gratefully acknowledge the research support from the Institute forCompetitiveness & Prosperity and the funding support from the Ministry ofEconomic Development, Trade and Employment. We look forward to sharingand discussing our work and findings with all Ontarians. We welcome yourcomments and suggestions.Roger L. Martin, ChairmanTask Force on Competitiveness, Productivity and Economic ProgressCourse correction: Charting a new road map for ontario5

6Task Force on Competitiveness, productivity and economic progress

Course correction:Charting a new roadmap for OntarioOntario has not made headway in closing its prosperity gap withits North American peers. In 2012, Ontario’s GDP per capita rankedfourteenth among the sixteen North American peers. Ontario addedonly 150 to its GDP per capita from its 2011 level, which increasedthe prosperity gap – the difference in GDP per capita between theNorth American peer median and Ontario – by more than 750.This finding reflects a story of complacency and missed opportunity for Ontariobusiness leaders and policymakers. Ontario is a long way off from reaching the goal set out by theTask Force of having its GDP per capita at the median of its North American peers by 2020. ThisReport sets out a number of major shortcomings Ontario must address to close its prosperity gap,but meeting the 2020 target will be challenging.Ontario has not yet achieved what is needed to drive competition and business growth. As a result,the province continues to lag most of its North American peers in terms of economic output.Productivity growth, especially in manufacturing, pales in comparison with that of the UnitedStates. Lower levels of investment persist in productivity-enhancing tools, such as machinery andequipment (M&E) and information and communications technology (ICT). Innovation, as reflectedby spending in R&D and patent output, is low.Course correction: Charting a new road map for ontario7

While these problems are longstanding, a number of other issues affecting Ontario’s prosperity haveemerged. Ontario’s scant and deteriorating infrastructure, both in its capital city and in other areas,is hampering economic growth. Public transportation, roads, and railways are not moving goodsand people effectively after decades of underinvestment. Amid stubbornly high youth unemployment (16.9 percent in 2012), it is also becoming increasingly apparent that Ontario’s education andtraining systems are insufficiently preparing young people to enter the modern labour market. Asa result, many youth are unemployed or underemployed and lack the skills needed to excel in theworkforce and jumpstart Ontario’s economy.In short, government and business leaders alike have contributed to Ontario’s lacklustre economicperformance. Now, Ontario must find ways to elevate its economic ambitions.Last year, the Task Force advocated for a “push for growth” and suggested various key investments and public policy reforms to spur Ontario’s economic growth. Yet there has been much moreprogress on the public policy front than the business front. The Ontario government has taken greatsteps to foster a competitive business climate and invest in future prosperity. But businesses havenot fully taken advantage of the many incentives that have been created to promote growth. Thismust change.This year, the Task Force maps out what is needed for Ontario to close the prosperity gap. ThisReport returns to the Task Force’s AIMS framework, which categorizes the factors involved inclosing Ontario’s prosperity gap into: Attitudes toward competitiveness, growth, creativity, and global excellence Investments in human and physical capital Motivations for hiring, working, and upgrading as a result of tax policies and government fiscalpolicies and programs Structures of markets and institutions that encourage and assist upgrading and innovation.The Task Force has created a comprehensive road map for Ontario to realize its growth potential.Throughout the Report, the Task Force has also identified a number of commendable innovators invarious fields that Ontario policymakers and business leaders can learn from to help implement therecommendations. It will likely take many years to reap the benefits of these actions, yet it is crucialthe province chart a course for a brighter future now.8Task Force on Competitiveness, productivity and economic progress

ATTITUDESBusinesses need to match their ambitious attitudes wi

COURSE CORRECTION: CHARTING A NEw ROAD MAP FOR ONTARIO 3 6 12 20 24 46 54 72 Foreword & Acknowledgements 4 CouRsE CoRRECTion: ChARTing A nEw RoAd mAP FoR onTARio onTARio’s innovATion And PRoduCTiviTy ConundRum ontario’s prosperity gap persists 13 raising productivity continues to be the key to closing ontario’s prosperity gap 15

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