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One Big Move – Canada’s Productivity Challenge

November 16, 2009

Canada’s Productivity Challenge 
The global economy is experiencing the biggest downturn since the Great Depression, and according to the IMF, this is the first time in 60 years that it will shrink. The federal government reacted swiftly by implementing Canada’s Economic Action Plan, providing $40 billion over two years in stimulus. When combined with provincial funds, the total stimulus will be $52 billion over two years, or 3.2% of GDP.

Now is an opportunity to step back from the immediacy of the downturn and look at the fundamentals of the Canadian economy, the most important of which is productivity growth. It is the only long-term determinant of prosperity and wealth. In the long run, nothing else matters.

Sprawl and Lack of Rapid Transit a Major Cause of Lagging Productivity 

A recent OECD review of the Toronto region economy ranked Toronto 31 out of 37 OECD metropolitan regions in economic and labour productivity growth over 1995-2005, far below the OECD average. If city-economies are the future of the global economy, then these numbers neither portend well for Canada’s largest city nor for the Canadian economy.

The OECD review confirmed what many have suspected – our productivity problem is not a result of government under investment in research and development (Canada ranks near the top of the OECD’s ranking of higher education investment in R&D and the most recent federal budget has only added to these investments). Rather, our productivity problem is a result of how households and businesses spend their time and invest their money, much of which can be traced back to how our cities – where the vast majority of Canadians live – are planned and built. A recent TD Economics report (A New Normal: Canada’s Potential Growth During Recovery and Beyond) confirms the OECD findings, attributing the lack of productivity growth to a combination of slumping R&D expenditures and flagging high-tech capital investment on the part of Canadian businesses.

The OECD review cites traffic congestion caused by urban sprawl and a lack of rapid transit as a major reason for Toronto’s lower productivity growth (70% of Toronto region commuters use cars to commute, one of the highest in the OECD). The traffic congestion in the Toronto region alone is costing the overall Canadian economy $3.3 billion a year in lost productivity, a figure likely mirrored in other large Canadian cities.

Rapid Transit and Densification go Hand-in-Hand 

Simply put, to increase productivity growth in Canada, we need to stop sprawl and expand rapid transit. Both go hand-in-hand, and one cannot be accomplished without the other.

Only by stopping sprawl can we can increase the density of our large cities and ensure that population growth occurs within existing built-up urban areas. These higher densities are required to generate the transit ridership revenues necessary to pay the operational costs of rapid transit systems.

A denser population does not require turning our cities into Le Corbusier’s canyons of towering skyscrapers. Densification can be accommodated by building five-to-eight story structures along major transit corridors, like Yonge in Toronto, Hurontario in Mississauga or St. Denis in Montreal. Either way – 40 story condos or five-to-eight story structures throughout the city – these cities would be the better for it.

This approach would also allow us to absorb the millions of new Canadians expected in Toronto, Montreal and Vancouver. In the Toronto area alone, the population is expected to grow by 50% by 2031, from 8 to 12 million citizens.

To more efficiently move people and goods, densification will require a big expansion of rapid transit. Some of this is underway, but we must go much further, much faster.

Effective transit systems do not come without a price; tens of billions are required to build these systems. But the alternative – more sprawl and the resultant car commuting – comes with an even higher price, both environmentally and economically.

A National Public Transit Act 

Densification of our cities and the expansion of rapid transit will require tighter coordination between federal, provincial and municipal governments in the area of urban and transit planning – what the OECD terms better “multi-level governance”.

Rapid transit systems require levels of investment beyond municipal means. These systems also have planning horizons in the order of decades, many years beyond the budget cycles of federal or provincial governments. Therefore, predictable long-term funding arrangements for local transit authorities are required from federal and provincial governments. The adoption of federal framework legislation will be essential to not only establishing long-term financial predictability, but also to obtaining specific financial commitments from federal and provincial governments.

A National Public Transit Act (an idea first raised by Mike Wallace, M.P. for Burlington) would enable the creation and capitalization of a National Public Transit Fund, while establishing the broad criteria for the release of those monies from the fund. For example, the fund could commit $30 billion of federal money over the next 15 years for rapid transit – a rate of $2 billion a year, less than 1% of the federal budget – only to be released if matched by provincial funds and if certain densification and transit targets were met. This would create a national fund of $60 billion dollars to build rapid transit.

If the future of the global economy lies in its cities, then this is a certain way to build the Canadian city-economies of the 21st century.

It can cost up to $200 million a kilometre to build a subway system, and up to $80 million to build a LRT system. So, a $60 billion fund could build up to 1,000 kilometres of rapid transit in Canada’s largest cities.

Rapid Transit Would Spur Productivity Growth 

Rapid transit would save time wasted in traffic by millions of Canadians daily. It would also significantly reduce household expenditures, thereby increasing after-tax disposable income.

For the average Canadian household, transportation is the second largest discretionary item after housing. In a sprawling Canadian city, Statistics Canada data shows that an average household will pay $13,000 annually or more for transportation. In denser Canadian cities with rapid transit, that number drops to $6,000. In global cities with world-class rapid transit, like Hong Kong, the average household spends $3,000 (CAD) annually on transportation, half of what a Montreal household spends and a quarter of what a Calgary household spends. And Hong Kong’s gross domestic product (GDP) at purchasing power parity (PPP) per capita is higher than Canada’s. The correlation between reduced household expenditure on transportation and higher household income is startling. Reduced expenditure on transportation provides families with more after-tax disposable income and a higher quality of life.

By getting people out of their cars and into modern world-class rapid transit, we reduce both the time wasted in traffic and the annual household expenditure on transportation. This, in turn, will allow households and businesses to redeploy time and capital away from depreciable assets like the car toward more productive uses like education or savings. And this in turn, will lead to real, long-term productivity growth and prosperity.

New Markets for Environmental Goods and Energy Conservation 

Rapid transit expansion also has the added benefit of addressing future demand in new markets for environmental goods and the need for energy conservation.

Political pressure and scientific evidence are forcing governments to create new markets for goods that were free, such as carbon. The need to halt habitat loss for species at risk, protect fresh water resources, stop the loss of farmland for food and reduce greenhouse gases will all drive the creation of new markets.

Last year’s record $147 for a barrel for oil illustrated the need for energy conservation. A widespread prediction – from bank analysts, from the International Energy Agency in Paris, from companies like Total (the fourth-largest, publicly traded oil company in the world) – is that higher energy prices are part of our future.

Government investment in rapid transit systems will help Canadian businesses develop products for these new markets, while at the same time help Canadian families reduce their energy consumption.

The Largest Rapid Transit Manufacturer in the World is Canadian 

Expanding rapid transit in Canada would yield another benefit by building on an already developed Canadian expertise in the design and manufacturer of these systems. Canada is home to firms that are globally dominant in rapid transit manufacturing, and the world’s largest is Canadian – Bombardier Transportation.

Greater rapid transit investments would deliver world-class rapid transit to Canada’s largest cities, while allowing Canadian firms to leverage these domestic projects to further develop export markets.

Greater Rapid Transit Investments Could Rebuild our Manufacturing Sector 

The growing markets of China, India and Brazil all present huge opportunities for Canadian companies. These states have large and growing populations where hundreds of millions are migrating to cities.

According to a 2008 McKinsey report, China will have 219 cities with populations greater than one million and 24 cities with populations greater than five million by 2025. According to City Mayors, an urban affairs think tank, India will add 220 million to its cities by 2025. This represents 25 cities the size of New York.

The galloping urbanization of the developing world will create a huge demand to move people and goods efficiently, a demand that could be met by Canadian companies.

Conclusion

A large step toward improving Canada’s productivity requires increased densification of our large cities and the construction of much more rapid transit.

Too ambitious? Not really. In a matter of months during the Second World War, we “re-tooled” our auto sector to build tanks, bombs and guns. Now would be a good time to “re-tool” our manufacturing sector away from building cars to building rapid transit. Nearly 150 years ago our young nation, with a fraction of today’s population and far less wealth, forged Confederation with a railway that snaked thousands of kilometres through a virgin wilderness.

Governments have a role to play in this transformation, and in the process improve the productivity and quality of life of millions of Canadians by allowing them to commute more easily across Canada’s largest metropolitan regions.

Building rapid transit for urban Canada would help rural Canada. The manufacture of big city rapid transit takes place in small town Canada. La Pocatiere, Quebec builds New York’s subway cars. Thunder Bay, Ontario builds Toronto’s subway cars.

From the small towns where the rapid transit would be manufactured to the big cities where it would be used, all Canadians would benefit. With one big move, we can remake our cities into global centres, rebuild our small town manufacturing economy and forge a new ribbon of steel.



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