Support for the manufacturing sector – far-reaching reforms required

As is the case in many Western countries, the manufacturing sector in Quebec is suffering. Since the early 2000s, close to one in five manufacturing jobs has disappeared, and manufacturing output has fallen considerably.

Although Quebec’s is not the only economy to be experiencing this decline in the economic weight of the manufacturing sector, the province has fared worse than most. In short, our analysis shows that manufacturing activity began dropping off much earlier here than in Ontario or among the six largest manufacturing nations.

Quebec’s exceptionally poor performance has structural roots. Our analysis shows that the structure of the manufacturing sector is dominated by low-tech industries: textiles, clothing, paper, furniture, and wood derivatives. The predominance of such industries, traditionally considered “soft” sectors, has precipitated the decline in manufacturing in Quebec, in part because of their greater exposure to international competition, but also because they are more vulnerable to exchange rate fluctuations. The over-representation of such industries explains why the province’s manufacturing sector remains weak.

This sector, as we know, receives considerable support from the Quebec government. Given the lack of a real recovery in manufacturing, this raises questions about the effectiveness of the government aid given to manufacturers. Our analysis concludes that the system of supporting manufacturing firms is complex and very often misses its targets.

To be effective, government assistance must respect four principles. First, direct assistance is preferable to tax relief, to ensure better control over the results and reach the target objectives. Second, government aid targets must match the needs of the manufacturing sector, rather than attempting to help as many firms as possible by scattering assistance over the entire sector. Third, assistance to the regions must be reviewed in order to boost companies’ productivity, rather than employment. And last, assistance must be tailored to the structural needs of the manufacturing sector, so as to derive as much benefit as possible from the most successful initiatives in the target technological sectors.