Understanding the Prosperity Gap between Australia and Canada

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Understanding the Prosperity Gap between Australia and Canada
  • Despite many similarities, the Canadian economy has underperformed Australia’s since the mid-1990s.
  • This under-performance is evident in measures of economic growth, growth in average living standards, and productivity.
  • In 2021, whereas Canada’s average standard of living was 78 percent that of the United States, Australia enjoyed average living standards that were 82 percent of the US level, a four percentage point difference in Australia’s favour.
  • Australian output per hour worked (labour productivity) is around 80 percent of the US level, whereas in Canada it is 76 percent of the US level.
  • Australia’s outperformance is due to extensive economic reforms since the early 1980s that have been widely credited with a productivity surge in the 1990s, although Australia’s productivity growth has slowed more recently in line with global trends.
  • Australia’s superior productivity performance is also due to historically higher rates of investment spending as a share of the economy. Business investment spending is one of the main channels for the adoption of new technology and innovations.
  • The key role played by investment spending in explaining the outperformance of the Australian economy suggests Canada needs to pay more attention to policies that may be inhibiting domestic capital formation.
  • Australia’s economic reforms have also facilitated the reallocation of labour and capital to more productive sectors of the economy.

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