This column by Doug Saunders on the "resource curse" in last Saturday's Globe and Mail is quite dreadful:
When the price of oil is the foundation of your country’s economy, a sudden plunge to half its value focuses the mind wonderfully, doesn’t it?
One's heart sinks at the very first sentence: the premise is wildy at odds with the facts and can lead to nothing useful.
Do you think that looks like an economy whose foundation is the price of oil? Me neither, but the facts be damned: there's a narrative to construct! (In case you're curious, NAICS sector 21 accounts for less than 25% of Alberta's GDP.)
Phrases such as “resource curse” suddenly sound a lot less like airy academic vagaries. Boasts such as “energy superpower” sound less confident and more tragic. And it becomes harder to dismiss as fictions or insults terms such as “staples trap” or “Dutch disease” or “bitumen cliff.”
Oh dear lord. If God provides you with an abundance of something that the rest of the world values highly and is willing to pay through the nose to obtain, then this is a blessing, not a curse. If the 'resource curse' has any meaning, it has to do with politics, not economics. In countries with weak institutions, resource rents are often captured by elites and can reinforce their power. (Daron Acemoglu and James Robinson's Why Nations Fail is probably the definitive take on this point.) In Canada - and Alberta and Norway, come that - strong political institutions have made sure that the resource wealth is widely-shared, and not squirrelled away in oligarchs' offshore bank accounts.
Those all refer to a well-known phenomenon: When an economy is built on the extraction of raw materials, the incoming flood of easy money makes it very difficult for a country to thrive in non-resource fields. During a resource boom, your pumped-up currency and labour costs hurt other export industries and many service sectors.
I can only infer that it is received wisdom on the Globe and Mail's op-ed pages that high wages are a Bad Thing. It wasn't so long ago that Gary Mason was using the same platform to tell us that low wages were the path to prosperity, because, well, he doesn't seem to understand just what it means to be prosperous. Nor does Doug Saunders, apparently. (Again, please read Joe Heath on this.) According to the Globe op-ed page, workers' leaving the manufacturing sector in search of higher wages is something to be regretted, because <reasons>.
Your competitiveness plunges.
Whose competitiveness plunges? As Paul Krugman once explained at great length, "competitiveness is a meaningless word when applied to national economies. And the obsession with competitiveness is both wrong and dangerous." This sort of statement makes sense in the context of a firm whose business model is based on having access to low-wage workers, but to go from there to claim that the Canadian economy is somehow worse off when wages rise is, well, 'both wrong and dangerous'.
You lose interest in innovation, research and development, because you make more money taking things out of the ground.
This is what Macleans' Colby Cosh calls the 'Beverly Hillbillies' theory of the oil sands: "One day [Jed Clampett] was shootin’ at some food, and up from the ground came a-bubblin’ crude." The notion that Alberta's oil wealth is just sitting there, waiting to be gathered up by unskilled yobs is both widespread and wrong. As Cosh puts it, "The oilpatch isn’t distinguishable from other kinds of mining or manufacture, or even service businesses, in the degree to which it involves risk, innovation, or scientific sophistication."
Despite the wealth flood, you run up public and private debt, because rates are low and the boom seems perpetual. You become dependent on imports of both goods and debt, which are cheaper when your currency is strong.
I can barely parse this. Is he talking about external debt or total debt? If he's talking about external debt, it should be noted that external assets have grown even faster. Indeed, the recent depreciation of the CAD has increased the net international investment position by pushing up the CAD value of foreign assets. To the extent that public and private debt have increased in Canada, the obvious explanation is the recent recession and record-low interest rates. Other countries that don't export oil have seen the same. Moreover, the whole point of engaging in international trade is to obtain imports: the improvement in Canada's terms of trade has increased our purchasing power.
Then the boom comes down on you. At the moment, most petroleum-based countries are feeling it. Russia is devastated: After spending its reserve savings trying to save the ruble, it’s now facing ruin. Hyperinflation has kicked in. Food prices rose by as much as 30 per cent. Mortgages, which most Russians put in more stable foreign currencies, have become unsustainable.
Venezuela, which used oil revenues to prop up an artificial economy by subsidizing food and fuel, is faring even worse. (Indeed, reports suggest that Cuba’s rapprochement with the United States this week happened, in part, because Havana feared the total demise of its partner state.)
But what about Canada? We’ve been hurt – the dollar’s plunge and Alberta’s looming fiscal crisis are just a start. But we’re not Russia or Venezuela. They can fairly be called rentier states: That is, everything their governments do depends on payments for petroleum. Canada is more than a pool of oil and a flagpole, isn’t it?
Yes and no. Canada has many other industries, although a good number of them are also resource-based – and during the 2000s, there was a “commodity convergence” so the prices of everything from oil and gas to food grains often rise and fall together.
In 2000, raw resources accounted for 40 per cent of Canada’s economic activity. By 2011, it had risen to almost two-thirds.
If you saw this column in the print version, this is what you read. And if you are even remotely familiar with the facts of the Canadian economy, you probably said something like this:
The online edition was quickly edited and now reads:
In 2000, raw resources accounted for 40 per cent of Canada’s economic export activity. By 2011, it had risen to almost two-thirds.
The goalposts have shifted from "the price of oil is the foundation of your economy" to "raw resources", but let's let that pass. It's still wrong. Total exports in 2011 were $620.1b, and here are the components that could be ascribed to the "raw resources" category:
- Farm, fishing and intermediate food products: $24.1b
- Energy products: $103.7b
- Metal ores and non-metallic minerals: $20.7b
- Forestry products and building and packaging materials: $30.4b
Adding those up gets you to 29% of total exports - less than half of the claim made in Saunders' column, after the correction. Energy exports account for 17% of total exports and about 6.8% of GDP. Petro-economy, indeed.
Was Canada’s resource boom actually destroying the viability of other industries?
To the extent that it was destroying the viability of industries whose business model was based on paying low wages, perhaps it was. I don't have a problem with that.
During peak boom years, it was unacceptable even to ask.
This is must be some kind of joke. The question has never stopped being asked ever since oil prices started rising in 2002. The Ontario manufacturing lobby has never been in the habit of staying quiet when things didn't go its way.
When the Opposition leader noted in the House of Commons, in 2012, that a federal study had shown that Canada was falling prey to “Dutch disease” (named after the 1960s oil boom, which devastated other exports in the Netherlands), Conservative MP Kellie Leitch offered the government’s response: “The leader of the Opposition wants to call Canadian employers a disease.”
Even some far better informed Canadians made light of the problem. One popular counterargument was best expressed by Mark Carney, then Bank of Canada governor, in a 2012 speech in which he acknowledged that some “Dutch disease” factors were present, but said we shouldn’t worry because it was good money...
Here I think I'll just direct people to this blog post I wrote for Maclean's: "Why do they call it Dutch 'disease', anyways?"
...and, besides, oil prices were going to remain high for a very, very long time.
“The bank’s view is that a large, sustained increase in demand is the primary driver of elevated [oil] prices,” Mr. Carney said. “The breadth and durability of the commodity rally underscore this conclusion.” He pointed out that “rapid urbanization” of the developing world would keep demand high throughout the foreseeable future.
He, and much of Ottawa and Moscow and Caracas, failed to consider the possibility that it would not be lack of demand but rather abundance of supply (led by huge new U.S. reserves) that would kill the boom.
Once again, the goalposts have been moved. The claim is now that because oil prices stopped rising, it was a bad idea to take advantage of higher oil prices when they were rising. This doesn't make any sense. Or at least, it makes at least as much sense as this tweet from circa 2005:
Sauders - and many, many others - appears to be labouring under the notion that economies must decide upon a given allocation of productive resources across sectors and stick with it for eternity. The idea that labour and capital can be re-allocated as relative prices evolve is an alien notion to these people. But textbook economics would tell you that it's good idea to shift away from resources when their prices fall, and that it's a good idea to shift toward resources when their prices rise. Governments don't have to get involved.
There were two ways to avoid a resource trap:
Given the size of the resource sector, this question isn't of much interest. How about ways of avoiding the manufacturing trap?
By investing heavily in “smart” industries (which Canada did a bit of)
Who, exactly, was supposed to have done this investing, and why?
and by keeping the oil revenues out of your own economy like Norway (which puts more than 90 per cent of its petroleum earnings into non-Norwegian investments, to keep the money beyond its borders).
This wouldn't have affected the shift to the resource sector.
Canada did the opposite: We spent, even more than we earned.
There's no factual basis for this claim. Net wealth has increased, and Canada's net international investment position has improved.
Much like those other energy superpowers, we somehow used a money flood to build up large levels of both public and private debt,
That's not what happened. See above.
much of it denominated in foreign currencies that are becoming more expensive by the day.
This doesn't pass the smell test. If that were the case, then the depreciation of the CAD would have the effect of reducing our net international investment position, as the CAD value of foreign-currency liabilities increased. The opposite is happening: this increase is more than offset by the CAD value increase in foreign assets.
Resource curse indeed. It might be time to start taking those insults seriously.
Maybe it might be time to start taking some basic textbook economics seriously.
This column is yet another example of anti-economics. Nowhere does it make reference to or mention of such basic concepts as comparative advantage, and its grasp of the basic facts is shaky at best. And yet it is confidently presented on the op-ed page of Canada's Newspaper of Record.
Coda: Today's Globe has this remarkable chart:
Both series are measured in the same units, but by having two y-axes and telescoping the scale of the axis used for energy exports, it produces a chart in which the scale of variation of the energy series is exaggerated to support the claim just above the chart.
Here is what you get using the same axis for both series:
Such is the quality of the economic analysis we can expect from the Globe.