Canada’s new economic reality

 

As Canada emerges from the Dark Decade, we need to get back on track with a modern economy.

The Harper government’s plan to make Canada an “energy superpower” was a disaster for a number of reasons. The plan reversed our progress as an industrial nation; it insured that Canadians would become the highest per capita emitters of CO2; it failed to anticipate the vagaries commodity markets.

lumberjack

As long as we are hewers of wood and drawers of oil, we are just a colony of economic powerhouses. Mel Watkins identified this failed strategy as the “staples trap” in 1963.

“The tendency for the country to tilt its economic resources and policies in support of one particularly in-demand staple or another that, inevitably, leaves the economy struggling when the staple falls out of favour (David Parkinson, Globe and Mail, July 2, 2016).”

Watkins, now 84, looks back on the Dark Decade: “We bet the farm on oil prices staying high and rising, but that hasn’t happened and, it would seem, is unlikely to in any near future. We need to go back to the 1970s when there was genuine debate in Canada about industrial policy transcending staples.”

Back then, after World War II, Canada had shifted its workforce from agriculture to factories. By 1999, the high-value sectors of automotive, aerospace, transportation, electronics and consumer goods employed 60 per cent of the workforce. At the same time, the resource-sectors of agriculture, energy mining and forestry together only employed one-quarter.

What seduced Canada back into the staples trap? In a word: globalization. We gleefully sent manufacturing jobs to low wage countries with low environmental standards. Exports of metal ores doubled since 2000. Energy exports increased by 55 per cent at the same time as auto exports fell by 11 per cent. Economist Jim Stanford sums it up:

“The global commodities boom shifted Capital and policy attention towards extractive industries. Canada’s economy has been moving down, rather than up, the economic value chain.”

We’ve these cycles before where expansion in one part of the world triggers a global commodities boom. This time it was the modernization of China that triggered the boom. In the past it was the reconstruction of Europe and Japan after the war, and before that it was the rise of the U.S. as an industrial power.

Parkinson looks to future: “For the oil and gas business, the long term prospects look even more grim. The growing global momentum for green energy looks poised to steadily erode demand for fossil fuels over the coming decades. We may one day look back on the oil-price collapse of 21014-15 as the beginning of the end for the industry.”

During the Dark Decade, Canada invested heavily, not only in political resolve to exploit the dirty tar sands, but in the human and financial capital needed to dig the stuff up. It will take time to shift gears but Canada must shed its colonial mentality. It’s happening. Enbridge has invested $1 billion in wind-energy. Alberta has budgeted $3.4 billion for renewable energy.

B.C.’s government still has grandiose dreams of a fossil-fuel economy with liquefied natural gas. While Premier Clark hasn’t yet admitted it, that plan is history.

Stop calling royalties a tax

In raising royalties, Rachel Notley’s NDP government is simply returning Alberta to its roots. Former premier Peter Lougheed urged a sensible development of the tar sands and fair royalties. After flying over the tar sands in 2006, he remarked:

Bust

“I was just up there on a trip, just helicoptering around, and it is just a moonscape. It is wrong in my judgment, a major wrong, and I keep trying to see who the beneficiaries are. It is not the people of the province, because they are not getting the royalty return that they should be getting.”

Corporations like to confuse royalties and taxes because they would rather not pay anything to government, regardless of merit or ownership. Royalties are “rents” says Gordon Laxter, economist and founder of the Parkland Institute of the University of Alberta.

“Many think of royalties as taxes. Any government fee must be a tax. Wrong. Private woodlot owners and musicians collect royalties. No one calls them taxes. When governments collect royalties they aren’t taxes either. Royalties are one way to capture economic rents. Leases, ecological charges and corporate taxes are other ways. Government ownership of resource companies is the only way to collect all the rents,” he says in the Monitor magazine.

By rents, Laxter means the profit from a piece of land or real estate. A tax is not that, it’s a levy on income. Royalties are rents, compensation for the use of public land.

When Lougheed flew over the tar sands moonscape, he was being rhetorical when wondering who the beneficiaries were. As former premier, he knew that the beneficiaries were Big Oil and not primarily those who owned the land.

Despite Lougheed’s pleading for Albertan’s to “think like an owner,” successive Alberta governments fell sway to the push from Big Oil who threatened to leave Alberta if royalties were increased. It was an idle threat, of course. Other governments, like Norway’s, impose higher royalties and Big Oil still continues to profit.

Western provinces tend to think small when it comes to their economies.  Like a young adult, no longer a teenager, provinces fail to think in grown-up ways. Western provinces have trouble seeing beyond living their parent’s basement and working at the equivalent of a fast-food restaurant – quick and easy natural resource extraction.

Mel Watkins, one of Canada’s foremost political economists, foresaw adult economies in his 1963 “staple theory of economic growth.” Simply put, his three pronged maturation involved the export of resources only after they had been processed; then on to the production of finished products instead of importing them; and finally, mature economies which become self-supporting and not dependent on resource extraction.

It hasn’t dawned on Western Canadians that we are there, at the third stage. We have cities with populations over a million; we are large enough to be self-supporting. Unfortunately, the quick-and-easy resource extraction mentality is hard to shake. B.C. Premier Clark imagines our future as the exportation of LNG and has lowered rents to please investors.

The reality is that B.C. and Alberta have the population, the talent and ingenuity to complete the last prong of Watkins’ vision. We need to think like grown-ups.