Oil prices are down lately, and over at the Broadbent Institute, Andrew Jackson is worried about the staples trap:
Building on the seminal work of Harold Innis, [Mel] Watkins argued that the dominant theme of Canadian economic history has been development fuelled by external demand for and investment in the development of Canadian “staples” or resources, from fish and lumber, to wheat, minerals, oil and gas.
While exporting resources can generate great wealth, the danger of such a path is that a staples economy becomes overspecialized in raw material extraction to meet foreign needs, and runs up large external and domestic debts over-developing the resource base and associated infrastructure. These become hard to service if and when external demand collapses, setting the stage for widespread financial dislocation along with painful losses of jobs and output.
You don't hear a lot about the staples trap in most economics programs, although I'm given to understand that it's moderately well-known in political science and "political economy" circles. I know about it because I did my BA at the University of Toronto in the early 1980s. I've never been particularly impressed by the concept, because it indulges one of the least useful memes in economics: the glorification of the manufacturing sector. This glorification has been leveraged by manufacturing sector lobbyists to our collective cost.
This is the accompanying text:
Canadian history has also affirmed that resource development creates powerful political interests that advocate for their industry based on the belief that resource extraction is the primary means of economic development. All of these factors (fixed costs, ecological scarcity, monopolies, political interests, resource-dependent policy mentalities, and regional specialization) are listed as rigidities in the chart (top circle).
Resource-based development can bring impressive economic expansion (for a while, anyway), making the rigidities seem like strengths. However, economies do not stand still. As the global economy shifts towards new technologies and core resource inputs, the staples are no longer demanded in the same quantity or at the same price. When this occurs, the inflexibility of resource-dependent regions can create new problems of adjustment (bottom-right circle).
Given economic and institutional rigidities, resource-based economies respond to these problems of adjustment by searching for new staples, or extracting even more of the same staple. These resource-dependent economies desperately seek new export markets to rekindle their status as “marginal” staple suppliers (returning back to the bottom-left circle). This pattern compares unfavourably to other economies, which might adapt to economic change through consolidation and the discovery of new technological opportunities.
What strikes me about this is that there's nothing in here that is specific to staples. You can replace 'staples' with 'manufactures' and you'd have a workable representation of the economy in central Canada - especially Southwest Ontario. Let's look at a reworked version of that first sentence:
Canadian history has also affirmed that manufacturing creates powerful political interests that advocate for their industry based on the belief that manufacturing is the primary means of economic development.
That rings true to me. Protectionist policies for manufacturers and a home-grown - but curiously not exportable - theory that equates a large manufacturing sector with economic development dominated Canadian economic policy for more than a century. Does anyone remember any political party campaigning for a "National Policy" (sic) to defend the natural resource industry? Me neither.
In fact, the 'manufacturing trap' story probably fits the facts better than that of the staples trap. Let's look at a couple of points often raised in discussions of the staples trap:
Foreign ownership: Here is Andrew Jackson:
Since about 2000, when non resource exports peaked at about 50% of the total, oil and gas have emerged as the new economic motors of Canada. As with the classic staple industries, foreign ownership is high (about one half of assets) meaning that profits are lost to Canadians.
Let's go to the data, in the form of Cansim Table 179-0004:
Looks like the manufacturing trap to me.
Vulnerability to movements in prices set in international markets. Prices of manufactured goods are set in international markets, just as commodity prices are. But unlike commodities, the prices of manufactured goods show a secular decline:
It is of course possible to counteract this decline in relative prices with improvements in productivity. But since Canadian manufacturers have found it more profitable to extract favours from pliant governments, that's what they do instead.
Indeed, the enthusiasm with which governments are willing to throw public funds at manufacturing firms is the strongest evidence of a manufacturing trap. Look at this recent story:
[Ford of Canada president and chief executive officer Dianne] Craig credited both the new labour agreement and the contributions of the federal and Ontario governments, which provided $142 million of the total $700 million investment.
New hires will start $20 an hour, instead of $24, and take 10 years, instead of six, to reach the top wage, which was $34.
These are not high-paying jobs: the median wage in Canada and in Ontario is somewhere north of $20/hour. Let's do some math: 1000 workers times $20/hour times (say) 37.5 hours/week times 50 weeks/year = $37.5 million/year. $142m/($37.5m/year) = 3.8 years. Governments are essentially promising to pay Ford to cover the cost of hiring people to work for sub-median wages for a period of almost 4 years. And you only need to be a wee bit cynical to wonder what sort of request Ford will be making three or four years out to preserve those jobs.
The crazy thing is that this considered to be accepted practice: we're told it's the price we have to pay to retain manufacturing jobs. And so we get pundits on the Globe and Mail op-ed page earnestly peddling the notion that we have to persuade workers to accept lower wages in order to preserve high-wage jobs. (Do read Joe Heath's elegant takedown.)
But the best way of viewing this sort of behaviour is the Manufacturing Trap. Policy-makers have bet so much on the manufacturing sector for so long that they simply cannot think of anything else to do but to double down.