Can AI finally spark a breakthrough in Canada’s longstanding productivity problem?
While government tax incentives exist to encourage business investment in machinery and equipment, technology and worker training, any economic transformation may be slow in emerging, writes Les Whittington. / ISTOCK PHOTO
Much of the discussion around Artificial Intelligence has focused on its role as a disruptor, but the Bank of Canada is eyeing it as a possible solution to this country’s dismal productivity performance.
If that is realistic, it’s certainly needed, because Canadian labour productivity has been in decline for the most part for at least a quarter century.
This is the situation despite Canada’s abundant resources, talented workforce and access to global markets, McKinsey & Company reminded us in a recent study.
Despite these strengths, Canada’s performance has eroded, the study noted: “While headline GDP continues to grow, real GDP per capita fell 1.3 percent in 2023 and 1.4 percent in 2024. This has left Canada near the bottom of the G7 on a per-person basis.
“Over a longer horizon, labour productivity (GDP per hour worked) has been broadly flat, contributing to a drop in Canada’s productivity rank within the OECD from a top ten position in the early 1980s to the midteens by 2022,” the study said.
This slowdown in productivity reflects numerous structural and policy-oriented hurdles, ranging from inadequate competition in the business sector to over-regulation to an economy made up to a large extent of small businesses. But it all comes down to lack of business investment in machinery and equipment, the key factor in the development of the economic productivity that, in turn, drives prosperity.
Widespread AI adoption could create significant improvement
Governments have wrestled with this problem for years without success. But the BoC now says there is potential for significant improvement in the years ahead if Canada’s businesses are able to adopt AI effectively on a widespread basis.
“As AI continues to improve and its adoption spreads, it could permanently change how the Canadian economy works,” BoC External Deputy Governor Michelle Alexopoulos said in a speech earlier this month entitled “AI is knocking: Canada’s next productivity story.”
If AI is widely adopted, the technology will keep improving, adoption will broaden, and new spillovers and uses will continue to emerge, she said. “Productivity will improve and jobs will be transformed. Stronger productivity will make businesses more competitive, leading to higher wages for workers, cost savings for consumers and less pressure on inflation.”
There are signs that businesses in a few sectors are beginning to move to AI, and surveys show that workers adopting the new technology are saving time, particularly in such sectors as financial risk management and medicine, according to the BoC’s research.
But it’s not clear if, and when, businesses will be willing to make the investments in AI needed to accelerate this transformation.
“Many businesses that are not yet using AI say it’s because the technology does not meet their needs or their workers don’t have the right skills,” Alexopoulos said. “But as new applications emerge, costs fall and workers build the necessary skills, more businesses will be able to integrate AI into their operations.
“For now,” she added, “AI adoption remains concentrated in a few sectors. This means that even if some firms are seeing benefits, it will likely take time before significant gains show up in overall productivity data.”
To achieve a meaningful increase in productivity through AI, it will require business to commit significant funds to incorporating the new technology – part of a much larger lift of $500 billion in total business investment over five years Prime Minister Mark Carney views as necessary to strengthen the economy.
While government tax incentives exist to encourage business investment in machinery and equipment, technology and worker training, any economic transformation may be slow in emerging. That’s because, unfortunately, businesses thinking about investing to expand or improve efficiency are currently facing unusually stark uncertainties over the potentially long-lasting negative impact of the Iran war and the renegotiation of Canada-U.S. free-trade.
