Removing regulatory barriers to competition in Canada could grow the economy by up to 10 percent over the long term, says Competition Bureau Canada.

This is based on an independent, peer-reviewed study, The Potential Impact of Pro-competitive Regulatory Reforms on Productivity and Growth in Canada, commissioned by the Competition Bureau. The study was conducted by international productivity experts and published in the International Productivity Monitor.

Authors of the study were: Gilbert Cette at NEOMA Business School in France, Jimmy Lopez at Université de Bourgogne in France, Giuseppe Nicoletti  at LUISS University in Rome, and Océane Vernerey at Université de Bourgogne.

The authors highlight that current regulations in four key sectors in Canada – energy, transportation, retail distribution, and professional services – are more restrictive than necessary and more restrictive compared with peer countries.

The study found that making these rules more competition-friendly would create a stronger environment for innovation, help close the productivity gap with leading economies, and raise living standards for Canadians.

Gains would originate from procompetitive reforms in all sectors, with the largest ones coming from the professional services and retail distribution, according to the study.

The study also noted that the estimated 6.5 percent to 10 percent boost – up to $300 billion, or a per capita gain of about $7,500 – to Canada’s GDP is conservative and reflects only part of the potential benefits. Additional gains could be realized by:

• reducing barriers to trade within Canada.
• making it easier for workers to move between provinces.
• attracting greater investment from abroad.

This study looked at how regulations that restrict competition in a subset of sectors – (energy, transportation, communications); retail distribution (liquor, gasoline, grocery, medicine); and professional services (accounting, legal, engineering, architecture) – that are key providers of intermediate inputs to the rest of the economy can influence aggregate productivity developments.

Together, these sectors’ output represents 30 percent of the Canadian GDP and 40 percent of intermediate inputs used in other sectors of the economy.

Overall, labour productivity growth in Canada declined from an average of 2.3 percent per year over the previous four decades to only 0.9 percent per year in the 2000s, a rate close to that of the Euro Area (EA) the study noted.

Labour productivity levels, which were half way between the EA and the United States in the 1970s, aligned with those of the EA more recently, suffering a 20-percent gap relative to the U.S.

“Given that productivity is the principal engine of GDP per capita growth, this deceleration has led to disappointing gains in living standards, as reflected in a widening gap in GDP per capita relative to the United States,” the study authors said.

Both past and recent research has related the disappointing Canadian productivity performance to weak competitive pressures and distortions due to restrictive product market policies, they said.

Some research points to regulations weakening competitive pressures in the non-manufacturing industries, suggesting that these may have curbed the adoption, diffusion and efficient use of information and communication technologies.

Other research has attributed about half of the widening productivity gap between Canada and the U.S. to rising resource misallocation due to market distortions partly reflecting policy-induced barriers to interprovincial mobility of labour and capital.

“The time-consistent Organisation for Economic Development and Co-operation regulatory policy indicators reveal that, relative to peer countries, Canada has lagged in implementing ambitious pro-competitive reforms in most of the key non-manufacturing sectors covered by the analysis.”

Reforms to anti-competition regulations in other countries haves increased GDP

The sectors currently characterized by subpar regulatory approaches account for a significant share of intermediate inputs across the economy, including in high-tech manufacturing and ICT industries that are vital to digital-era growth.

“Delays in reforming energy and transport turned Canada from one of the least to one of the most restrictively regulated in these sectors,” the study noted.

In contrast, national competition reforms adopted by Australia in the 1990s led to a permanent boost in GDP of 2.5 percent, which equates to approximately A$5,000 per household today. Australia is currently undertaking another round of such reforms, with anticipated gains of a similar magnitude.

Heightened competitive pressures resulting from reforms implemented in other countries increase incentives for incumbent firms to improve efficiency and innovate, while simultaneously forcing less efficient firms out of the market, the study said.

Second, reducing barriers to entry and firm growth allows new, efficient and innovative firms to emerge and thrive.

These mechanisms foster productivity gains both within firms and across sectors, by facilitating the reallocation of resources where they are most productive, while also enhancing overall business dynamism.

Third, the resulting productivity improvements in key upstream sectors that supply intermediate goods and services can cascade through supply chains, amplifying the positive effects of reforms on the broader economy.

Taken together, these three channels contribute to stronger aggregate productivity and GDP growth.

More recent studies emphasize that imperfections in goods and services markets – especially in upstream sectors that provide intermediate goods – can dampen the incentives of downstream firms that use those goods in production to improve productivity via restructuring, investment or innovation.

Anticompetitive regulations in upstream industries work their way to downstream industries by changing incentive structures, the study pointed out.

Regulation that unnecessarily curbs competition upstream grants market power to regulated firms, allowing them to raise prices and capture rents.

While these rents could in principle be used for research and development, firms enjoying them often have little incentive to innovate, as their dominant market position reduces the need for further efficiency gains, the study said.

When upstream firms gain excessive market power, they can appropriate a share of the returns from downstream innovation (e.g. by overcharging for the supply of their products), thereby discouraging entry and efficiency enhancements in downstream markets as well.

Furthermore, the concentration of upstream suppliers reduces competition and limits the variety of products available for downstream firms, further undermining their ability to innovate and improve quality.

“With lower incentives to innovate in both upstream and downstream industries, the result is lower aggregate productivity growth,” the study said.

Canadian product markets suffer from a lack of competitive pressures

 “As widely discussed in both the academic and the policy arenas, Canadian product markets suffer from a lack of competitive pressures, especially in the nonmanufacturing industries,” the study said.

Regulatory settings are still adverse to competition in some important services sectors – such as the professional services – and liberalization in some network industries has been slow and limited – such as in energy and transport.

This is compounded by the persistence of differences in regulation and other hindrances to mobility across provinces that curb competitive pressures at the national level as well as by the existence of barriers to foreign direct investment and trade in services that limit competitive pressures from abroad.

Research shows that interprovincial trade barriers are economically significant and involve high costs in a number of activities, such as for example in trucking and professional services.

Such costs are especially relevant for small and medium-sized enterprises, which constitute the backbone of the Canadian economy and whose inability to upscale has been related to weak aggregate productivity growth

Regulatory reforms in Canada would increase GDP by up to $300 billion, or a per capita gain of about $7,500, the study found. A 10-percent gain in GDP corresponds to about 50 percent of Canada’s current GDP gap with the U.S.

“The findings provide compelling evidence that implementing pro-competition regulations has the power to unlock significant economic growth for Canada,” the Competition Bureau said. However, given their scope and depth, the reforms required to adopt best practices will need time to be implemented and the corresponding productivity gains will also unfold slowly, according to the study.

“The political cost of ambitious structural reforms is immediate and can be high, as the professions and activities concerned oppose them and defend their anti-competitive rents, while the induced economic benefits only appear gradually.”

The study concluded: The gap between the immediate and delayed effects of reforms and between the beneficiaries and the losers from reforms contributes to explain why many countries, including Canada, may find it difficult to undertake such wide-ranging and swift regulatory changes.

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