5 Conclusions

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When comparing capital intensity across countries, one must grapple with potential differences in methods and data sources. This paper approaches this problem by standardizing one critical set of assumptions so as to produce a more comparable set of estimates. It starts by adopting a common set of depreciation estimates for the two countries and then estimates capital stock using the perpetual inventory technique. While it is possible that capital depreciates at different rates across countries whose economies differ in terms of their competitive characteristics, Canada and the United States are sufficiently similar that differences seem unlikely.

Making use of a comparable set of depreciation rates changes the nature of conclusions about the capital intensity of the two countries. If comparisons of capital intensity are made with the depreciation rates that are used by Statistics Canada in its productivity program and by the Bureau of Economic Analysis in its estimates of capital stock, then the stock of capital as a share of gross domestic product (GDP), or capital intensity, is lower in Canada. However, once we impose common depreciation rates for similar asset classes, Canada's capital intensity is higher than that of the United States. The trend, however, is slightly downward since 1987—though the decline is less when expressed in nominal rather than constant dollars. While capital–GDP ratios for engineering assets increased, they remained basically the same for building assets; information and communications technology (ICT) machinery and equipment (M&E) intensities declined.

Capital–output ratios as summary statistics tell us about the nature of the production process. Higher capital–output ratios indicate that more capital is being used in production. Changes over time in these ratios have been used to generate conclusions about capital productivity or about the extent to which technological progress is mainly labour enhancing.

The data here suggest that at the level of the total business sector, capital intensity is higher in Canada than in the United States. But, at the level of the total economy, it is difficult to discern much of a difference in the overall capital intensity. It declines slightly more when measured in constant 1997 dollars, but is virtually unchanged when measured in current dollars.

There is always the danger when working with macro data for the entire economy that important differences in the underlying structure of the economy will be missed. Our examination of differences in the underlying components (both assets and industries) reveals that this is the case here.

While Canada has a higher overall capital intensity in the business sector—because it has more engineering assets and less ICT assets—the non-ICTM&E and building assets intensities are more alike in the two countries.²³ Setting aside the explanation that this comes from classification differences in the two countries, this strongly suggests a different aggregate production function that stems from a different industrial composition or from differences in production techniques that are associated with a different economy.

To address this issue, the paper uses shift-share decomposition analysis to examine whether the higher Canadian capital intensity is the result of differences in asset or industry composition. The decomposition analysis shows that Canada's business sector is more capital intensive, primarily because of its industry structure and because of a focus on engineering assets. Canada has a higher intensity industry by industry in terms of engineering assets and has more industries where the engineering asset–output ratios are higher. Two sectors—the primary sector (including mining) and utilities—are very intensive in engineering capital in Canada; together, they contributed the preponderance of the intensity effect advantage over the United States.

The industries where engineering assets are concentrated are the core infrastructure industries that provide universal services on which the rest of the economy relies—transportation, communications and energy. These industries are more important in Canada—both because Canada has an inherent comparative advantage in some natural resource sectors that are associated with these industries, and because the Canadian economy is more diverse geographically and requires more of the services of these sectors per unit of GDP produced than does the United States.

When industry structure is taken into account for the M&E asset class, most industries of Canada's business sector are less capital intensive than that of the United States. In the case of non-ICTM&E, there is a small deficit of about 12%. The deficit is more pronounced for ICT investments—some 33%. Canada's ICT capital intensity has been persistently lower than that of the United States, at least since 1987. The gap was fairly widespread across industries in 2003. It was particularly large in construction; transportation, warehousing and utilities; and the finance, insurance, real estate, and rental and leasing sector.

Finally, it should be noted that the non-business sectors in the two countries resemble one another when it comes to the use of buildings and engineering infrastructure, but they are extremely different when it comes to expenditures on M&E. The latter arises in part because of military equipment spending in the United States.

For any evaluations of the Canadian economy, one therefore needs to take into account the fact that it is composed of different sectors. It is not a homogeneous entity with a single production function that can be easily estimated from aggregate data. Policy prescriptions in cases like these may want to take into account the extent to which differences in asset composition arise from simple reasons such as those related to inherent comparative advantage, the nature of being a northern country with a lower population density than its southern neighbour and whether public policy-related factors favour the differences in Canadian-U.S. capital configurations.

 

^23. Non-information and communications technology machinery and equipment capital intensity is slightly higher in Canada when using Canadian depreciation rates, but slightly lower when using U.S. depreciation rates. Buildings intensity is about the same when using Canadian depreciation rates, but slightly lower when using U.S. depreciation rates (see Table 4). Since these two estimates bound a value of 1, it is difficult to reject the conclusion that capital intensity for these two assets is essentially the same. These are also the same assets where the statistical tests are least able to reject the null hypothesis that there are no significant differences in capital intensity across Canada and the United States (see Table 11).