Is Ontario in Decline?

With a battered manufacturing sector, a large public sector deficit, a drop in per capita GDP relative to other provinces and becoming a recipient of equalization, Ontario has definitely seen better days.  The question is whether this is represents a long-term trend towards economic decline for Ontario or is it simply a short-term aberration? 

Ontario has been the dominant regional economic presence in the Canadian federation since 1867.  In 1891, Ontario accounted for 44 percent of Canada’s population and according to Alan Green’s regional output estimates in his Regional Aspects of Canadian Economic Growth (1971) it produced about 49 percent of Canada’s output.  Today, Ontario accounts for about 39 percent of Canada’s population while producing about 37 percent of Canada’s output.  On the one hand, this can be interpreted as a re-equilibration of the Canadian federation given the growth of the federation since the 19^th century both in terms of population and output particularly as a result of the settlement of the West.  On the other hand, it still represents an overall relative decline within the federation in terms of population and output.

 

The accompanying figures attempt to put a more recent face on Ontario’s relative economic performance.  Figure 1 plots Ontario’s share of Canada’s GDP since 1961 while Figure 2 plots Ontario’s average share by decade of Canada’s population since the 1920s.  In terms of the GDP share, Ontario’s share was about 41 per cent from 1961 to the early 1970s and then plummets to just over 36 percent in 1981 (a recession year that hit Ontario manufacturing hard) and then rebounds quite quickly to reach just over 42 per cent in 1989.  Since 1989, however, Ontario’s share has moved downward picking up speed after 2000 and now sits at about 37 percent.  Both of the recent rapid drops in Ontario’s share of GDP coincide with booms in commodity and resource prices that generally benefitted western Canadian provinces.  Interestingly enough, according to the Green numbers, Ontario’s share of output dropped from 49 percent in 1890 to 41 percent by 1910 – coinciding with another commodity price upsurge that benefitted the west  - the wheat boom.  Ontario’s share of Canada’s population naturally also declined during the western settlement period.  Put another way, the variations of Ontario’s share of Canada’s GDP over the last 50 years are within the range of historical experience and are on their own not particularly troubling.  On the other hand, the last 20 years have seen a persistent relative drop in Ontario’s performance.  Is this simply a healthy rebalancing of economic weight within the federation or a symptom of long-term malaise?  The recent trends are more troubling if one realizes that since 1990, Ontario’s decline in the relative share of Canada’s GDP has been accompanied by an increase in its share of Canada’s population.  Relatively more people are producing relatively less output.  The productivity implications are disturbing.

Figure 1

 
 

 
Figure 2

 
 

Comments

[Stephen Gordon]

Bravo and welcome!

I'm almost tempted to go through the same exercise for Quebec; Ontario is invariably the point of comparison from here.

[Frances Woolley]

Livio - interesting. I wonder how the ease/difficulty of attributing output to particular provinces has changed over time. Think, for example, of the journal Canadian Public Policy - the editor is in Calgary, the business editor is in Ontario, the web page is hosted in Vancouver, the associate editors are scattered across the country, and the editorial office manager is in France. Which province is its output attributed to?

How much of the movement of output across provinces reflects purely nominal movements by corporations looking to lower tax liabilities?

[John]

Isn't the recent fall-off mostly attributable to the rise of oil as a share of Canada's GDP? The other drop off is during the 70's oil crisis.

[Aaron Holtzman]

Those periods of decline were also periods of historically high oil prices, which gave other provinces (like Alberta) a boom. Did Ontario's slice get smaller because the pie got bigger?

[Nick Rowe]

Hi Livio, and welcome to WCI!

[Jacques René Giguère]

In the early 80's as a staffer for the Quebec Liberal Party, I had the task
A) publicly , to prove that the "decline" in Québec's share of the Cdn economy was real and due to the" Barbarians at the gates".
B) privately explain to my primos that it was not the case.
Ontario citizens, brothers, fellow countrymen, welcome to my past nightmare of muddled understanding of data and mixed quotations.
Joking aside, it's 60-90 Québec revisited: rising commodities prices distort the total, havy investment ina capital intensive sectors distort the investment figures and a mutating overall composition of the whole province leads to temporary structural unemployment as capital and labor is "redeployed". Of course, in the reality-based community, capital is not redeployed but sent to the scrap heap while the younger workers are retrained and the rest sent to retirement. You get , for a time , higher recorded unemployment, then lower participation rate, then as the old guys definitely move into retirement, the numbers rectify themselves over 20-30 years.

It ia long , painful process for those involved and intellectually it tests what we call in Qc "la dureté du mental". The amount of idiocy that will spew from editorial rooms will be staggering. At least, in ON you will be spared the "Barbarians" part of it.

BTW, in my Québec, Canada, régions course, I have some simple modelling of similar processes in urban renewal using Conway's Game of life. It's really fun. Cegep is such a nice level for teaching.

And welcome Livio!

[Livio Di Matteo]

Thank you all for the feedback and the welcome. It is great to be working with Stephen, Frances, Mike and Nick and with WCI readers and commenters contributing to economic policy debate. Livio.

[Robert McClelland]

The productivity implications are disturbing.

All the more reason you need to stop driving and begin using that time productively. :-)

[Bob Smith]

"How much of the movement of output across provinces reflects purely nominal movements by corporations looking to lower tax liabilities?

I'd be curious how output is allocated accross provinces for national accounts purposes. For tax purposes it's based on where the corporation has permanent establishments and a formula based on the revenue and salaries/wages attributable to those permanent establishments. That's not to say you can't play games to get income out of one province into another or to otherwise reduce your taxes (although there are real legal and practical limits to doing so), but I doubt that that would expain material shifts in Ontario's GDP share.

[Mark]

Just blame it on the HST :)

[Kosta]

Nice post Livio!

I think it is an interesting question the degree to which commodity prices influences Ontario's "decline". However, for presentation purposes I think the message is confounded by keeping track of both Ontario's share of (Canada's) GDP and Ontario's share of (Canada's) population. It might be easier to simply track the ratio of these two measures, that is, Share of GDP/Share of Population. This measure could be readily compared.

[Christopher Jillings]

Please help out the non-economist. I downloaded the long-term report on Ontario's economy (http://www.fin.gov.on.ca/en/economy/ltr/2010/) and looked at Chart 12 which shows that Ontario took a bid hit in the early 1990s and 2006-2010. But otherwise GDP was growing pretty well to my untrained eye. So instead of worrying about Ontario's decline, shouldn't we celebrate other provinces getting richer?

[Azim Essaji]

Hi Livio,

If you're interested in productivity, which is what we should mostly care about, why not look at productivity directly? There are some measurement error and estimation issues that we should worry about, but it is still better than surmising from relative population/GDP shares, which do not account for price shocks, resource rents etc. Here are some cross-provincial productivity estimates from Andrew Sharpe at the the Centre for the Study of Living Standards: www.csls.ca/reports/csls2010-02.pdf .

None of his figures suggest that Ontario is in relative decline. Whatever ails Ontario, ails the rest of Canada, too. Ontario's labour productivity growth is roughly at the national average, and its capital and MFP growth is higher.