The OECD Economic Survey 2014 indicates that Canada experienced solid economic growth in recent years, despite the recession in 2008. Estimates show that Canada’s GDP will grow between 2.5 to 2.7 per cent in 2015, for instance, which is a welcome sign for the Canadian economy. A country’s overall economic performance, however, does not reflect regional economic performance. In Canada, although the economy has been performing well nationally, the regional economic outlook is a different story–one of divergence across provinces.
In the last few decades, intraregional economic disparities have widened in OECD countries and the 2008 recession seems to have exacerbated them. According to the OECD regional outlook, for instance, Canada has the 3rd largest regional economic disparities in the OECD since 2010. There are many studies, however, that rely heavily on the standard neoclassical growth model. Serge Coulombe and his colleague observed a decline in Canadian regional disparities, citing an “economic convergence phenomenon.”
In neoclassical growth theory, the term “economic convergence” typically means a decline in economic disparities between regions on account of poorer economies growing faster than richer ones. Evan Capeluck, in “Convergence Across Provincial Economies in Canada: Trends, Drivers, and Implications,” employed 25 economic variables to measure whether poorer provinces are catching up economically with their richer counterparts, which neoclassical economists theorize. Capeluck concluded that, in the long run, the ten Canadian provinces did experience economic convergence, but he indicated that “… there was divergence in economic variables related to income, productivity, and fiscal capacity.”
As shown in the chart below, with the exception of a few oil producing provinces, economic growth in most provinces grew less than the national average in 2013. Nova Scotia’s GDP, for instance, has grown slower than the national average for roughly two decades. In fact, in recent years, Atlantic Canada has experienced a significant outmigration of younger individuals and families, which not only affects the labour force, but also human capital–two of the most important determinants of economic growth.
The widening gap in economic performance across provinces is a serious threat to struggling provinces, such as those in Maritime Canada, where in recent years equalization payments from the federal government have declined as a share of GDP, due primarily to Ontario’s becoming a “have-not province.” This decline poses some economic and fiscal challenges to New Brunswick, Nova Scotia, and Prince Edward Island and these challenges may persist if Ontario’s economy continues to underperform. Equalization payments, and more broadly, federal transfers, comprise a significant share of Maritime Canada’s GDP. In fact, these provinces rely on federal transfers as a fairly substantial source of revenue and a small reduction in the share of equalization payments to those jurisdictions has a substantial impact.
Notwithstanding those developments that pertain to Canada’s equalization programme, the biggest obstacle facing the Maritime region is economic growth. Provincial governments in Maritime Canada should simplify the tax system, streamline regulations, and create an economic environment conducive to growth. Adopting more efficient policies that encourage competition is a good start.
Rinzin Ngodup is an AIMS on Campus Student Fellow who is pursuing a graduate degree in economics at Dalhousie University. The views expressed are the opinion of the author and not necessarily that of the Atlantic Institute for Market Studies