Blogs & Comment

Services matter—but making stuff is the core of any strong economy

Some say Canada should focus on growing service exports, but there’s something special about making things

Worker inspecting car door parts

A healthy goods-manufacturing sector is the foundation of any economy. (Oli Scarff/AFP/Getty)

We’re a nation of consultants. And accountants and bankers and lawyers, not to mention baristas, stylists and editors. But let’s focus on the first batch of professions. Those are the ones that make parents proud.

“Canada is a services economy,” the Conference Board of Canada declared this summer. As the employers of four in five Canadians, service providers lack the attention they deserve, the research group contends. “While much attention has been paid to the surge in popularity of Canada’s natural resources over the past decade, Canadian companies have been quietly and steadily increasing their international sales of services,” wrote the Conference Board’s Jacqueline Palladini.

It is a worthwhile effort. Data on services are weak. It is easy to measure the contribution of brake pad manufacturing to gross domestic product; it is harder to determine the value created by a team of Stantec Inc. architects and engineers on assignment in the Caribbean. Palladini uses the example of the smartphone, everyone’s favourite symbol of the modern economy. The devices—goods—are useless without a telecommunications network, the operators of which are providing a service. Selling the phone in profitable numbers requires an international advertising campaign (service). Retaining customers necessitates an effective help desk (service). The gear (goods) that went into the phone probably were manufactured by various subcontractors, requiring a team of supply-chain managers (service) and logistics providers (service) to get the final product to market. Many of those white-collar service jobs pay more than factory work, as they are occupied by people with higher educations, according to the Conference Board.

But does that make Canada a “services economy,” as the board says? Not really, in my opinion. Nor should we aspire to be one.

Service companies employ lots of people, sure, but they almost always owe their existence to the producers and harvesters of tangible things. A country that focuses too much on services is one that chooses to outsource its economic destiny. There’s a reason the United Kingdom suffered so dearly during the financial crisis: It allowed its economic centre of gravity to shift to banking. In the 1990s, India liberalized its economy in a way that favoured its budding information-technology companies but hurt its factories. Now India’s government is trying desperately to turn the country into a manufacturing hub, and IT-outsourcing giants such as Infosys Ltd. and Wipro Ltd. are struggling to grow, as the rise of cloud computing reduces their previous competitive advantages.

Canada has no obvious comparative advantage in services. Our universities generate lots of smart people, but so do schools in the United States, Europe and Asia. We have nice cities of the kind in which highly educated people like to live—as do a dozen other countries.

Our advantage is in food and resources. Consider trade with India: Half of Canada’s exports to that country of 1.3 billion people is represented by pulses, potash and, more recently, uranium from Saskatchewan. As drought afflicts more and more of the world’s farmable land, Canada guards a precious supply of water. Oil may never again reach triple-digit prices, but there will continue to be demand for it. We are among the limited number of countries with plentiful supplies of oil. That gives us the opportunity to become a truly diversified economy.

Yet the economy isn’t as diversified as it could be. There were 2.1 million factory jobs at the start of 2007 compared with about 1.7 million now. There is a tendency to fetishize manufacturing. But in resisting that impulse, we shouldn’t at the same time deny that there is something special about the making of things. A dense body of academic work demonstrates that one factory job correlates with multiple service jobs. For Canada to be a “services economy,” it must continue to be a manufacturing economy. The focus of policy-makers should be on the latter. The former will follow.