Manufacturing exports vs resource exports

The misguided notion that the shift from manufactured exports to resource exports is necessarily a bad thing has taken ferocious hold on many politicians and on much of the punditry. So I'm recycling something I wrote before to explain why it's wrong.

This is an extract from a column I wrote for Canadian Business magazine:

Suppose that we live in a country where everyone eats only doughnuts. We’re self-sufficient except for one thing: we need to import bananas to make banana cream doughnuts. Happily, foreign producers are willing to exchange truckloads of trees for truckloads of bananas. So some workers spend their time cutting down trees to send abroad, and the rest of us work on making doughnuts.

Now let's suppose that foreigners are no longer satisfied with trees: they will now only exchange bananas for furniture. Some workers must therefore stop making doughnuts and start transforming trees into furniture for export. Even though the national accounts would record an increase in the value-added of exports, this development is bad news. The reallocation of workers away from doughnut production means that we make and consume fewer doughnuts.

What happens if foreigners go back to accepting trees for bananas? The workers who had been making furniture for export can go back to making doughnuts. Although the national accounts would show a reduction in export volumes, we are clearly better off: doughnut consumption will have increased.

This is obviously not a realistic representation of the Canadian economy, nor is it meant to be. But it corresponds closely to what happened in the last two expansions in many important dimensions. In the early 1990's, commodity prices fell, and the only way for us to obtain the imports we wanted was to shift workers to the manufacturing sector, and to increase the value-added of exports. But devoting more of our productive capacity to making things that are to be consumed by foreigners isn't a path to prosperity, and workers' real buying power stagnated.

In 2002, commodity prices rose, and we were able to get the imports we wanted with less productive resources allocated to the export sector. The expansion of 2002-2008 was characterised by a shift out of export-oriented manufacturing, and these workers were able to produce more for domestic consumption. Exports volumes stagnated, but since we were getting better prices for what we sold to the rest of the world, real incomes increased.

Possibly the most important part of this parable is that it assumed that laid-off furniture makers could simply go back to making doughnuts. What about those 300,000 manufacturing jobs lost in the real-life Canadian economy?

It turns out that almost all of that decline can be explained by attrition: workers who left the manufacturing sector were not replaced. Layoff rates - and in particular, permanent layoff rates - remained fairly constant, and they were generally lower than they were during the 1994-2002 expansion. A manufacturing worker was less likely to have lost her job during 2002-2008 than she would have been during the latter half of the 1990's.

(The inspiration for this story was of course Krugman's hot dog parable.)

 

Comments

[Bill]

Good parable - but the analogy should be shifting from making donuts - to building automated furniture factories.

[Stephen Gordon]

Doughnuts = consumption goods. That's what's in the utility function, and that's all that matters.

[Bill]

The point I was trying to make (perhaps clumsily) is that "the expansion of 2002-2008" is different in that the demand for labour is in building the plants (in the case of oilsands in AB), not in the production of the resource once built.

[GabbyD]

i dont understand the parable. why would consumption fall? just move labor to the furniture business, and out of tree production... if furnitures have higher value (per unit of labor), real consumption must rise (at least in terms of banana donuts).

[Frank Dean]

I think where you will confuse politicians and pundits (and me) is that your analogy uses trees, a renewable resource. What happens in your doughnut economy when the supply of trees to export or make into furniture runs low? The worries about the oily tar sands seem to be very much connected to their exhaustibility.

[Stephen Gordon]

It really doesn't matter. The point is to get over the fetish of manufacturing value-added.

[The Keystone Garter]

Having an unemployed cdn costs somewhere between the price of welfare and the price of prison. Furniture and bananas are labour intensive industries. Argument holds for full employment or lots of profits and good safety net. Call it $10000 in taxes for every unworker.

[Colin Putney]

I don't understand the parable either - it assumes that trading furniture involves more labour than trading wood, but that we get nothing in return. But presumably we get *more* bananas in exchange for furniture, and so we're actually better off, because we can now eat more banana cream donuts than we could before.

Also, the parable suggests that shifting to more valuable exports doesn't benefit us. But hasn't basically every rich country gotten rich by doing exactly that? Exporting manufactured goods has been the path to prosperity for many, many countries starting with England in the industrial revolution and continuing today with China and Brazil. Why doesn't this apply to Canada?

[Simon van Norden]

Amen, Stephen....well said.

The only other way I've found to drive this point home is to ask people what they want their kids to do for a living when they grow up. They *never* mention a job in manufacturing; they always choose a job in the service sector (e.g. doctor, lawyer, software engineer, prime minister, bearded economics professor, etc.) I then ask why, if manufacturing is so terrific, it's only good enough for other people's kids?

[Stephen Gordon]

it assumes that trading furniture involves more labour than trading wood, but that we get nothing in return.

Pretty much. It's another way of saying that the price of raw logs fell.

[Jane Flemming]

The economists Jeffrey Sachs and Andrew Warner, for example, observe in a study that "one of the surprising features of modern economic growth is that economies abundant in natural resources have tended to grow slower than economies without substantial natural resources."

Countries that export substantial volumes of natural resources face other problems, namely a lack of transparency in the use of funds, institutional shortcomings, problems in other sectors, distribution issues, civil war, corruption, neglect of productive sectors of the economy and environmental pollution, which turn the blessing of natural resources into a curse for their population.

The harvesting or extraction of raw materials often has an adverse environmental impact. This is clearly indicated both by contributors to the current debates on the worldwide protection of global public assets such as biodiversity and water resources and by the Global Environment Outlook reports compiled by the United Nations Environment Programme (UNEP).

Human-rights issues also play a particularly significant role in the context of commodity-based economies, whether they relate to compulsory resettlement and the need for compensation, to fair shares of export revenue, to public consultation or to consideration of indigenous peoples.

Hearing held by the Committee on Economic Cooperation and Development on 20 September 20

Canada has experienced widespread electoral misdeeds, if not outright fraud for the first time in living memory, and, according to experts in parliamentary democracy, the state of our own parliamentary democracy is dire.

When manufacturing industries in Ontario die, and the towns and cities that they support die with them, how exactly do you expect people to sell their now worthless homes and move to Alberta, where there is currently inadequate infrastructure to support the population they already have, and do you seriously think that an economy based exclusively on resources is a healthy economy?

[Kuze]

What if many of the high paying tree cutting jobs were in a part of the country where it was less desirable to live? It's easy to talk about people shuffling around from sector to sector when they're an abstraction but it isn't exactly a sexy idea to think about moving to Fort McMurray (no offense McMurrayites).

That said, I believe some of the romanticization of manufacturing comes from academics/intellectuals who have never actually worked in a factory but in their conception of the common man as a simpleton believe that pulling a lever on an assembly line is all he is capable of. Here's the thing about working in the manufacturing industry: it sucks. It sucks in a similar sense to the way back breaking farm labour sucked, yet people in the 19th century smashed threshing machines nonetheless because they were losing their jobs to them.

[The Keystone Garter]

"Pretty much. It's another way of saying that the price of raw logs fell."

Welfare offices should be handing out wood stoves...
Seriously though, if I go to a mine or a petro-town, other than Edmonton, and it closes, I'm moving. Most cities are historically located near farms, transportation routes and/or infrastructure, and have built up infrastructure for the long-term. Moving costs me a few hundreds dollars, more for most as many investments only return full price if long-term.

[Frank Dean]

Simon van Norden wrote:

The only other way I've found to drive this point home is to ask people what they want their kids to do for a living when they grow up. They *never* mention a job in manufacturing; they always choose a job in the service sector (e.g. doctor, lawyer, software engineer, prime minister, bearded economics professor, etc.) I then ask why, if manufacturing is so terrific, it's only good enough for other people's kids?

Unless Prof. van Norden tells us what proportion of working-class vs professional-class parents he asked this question to, it is hard to interpret the results. It is possible that the results are completely explained by the circles a university professor is likely to move in. That is, parents generally assume their children will follow life paths rather similar to their own.

I eagerly await his numbers on how many wanted their kids to work in resource extraction, especially in jobs where you get your hands dirty.

[Bill]

SvG says: I then ask why, if manufacturing is so terrific, it's only good enough for other people's kids?

I think this reflects more on who you socialize with. If I'm not mistaken, the vast majority of the bloggers on this site are sons/daughters of teachers themselves. Perhaps you also qualify.

[rsj]

In manufacturing, the first thing you ask is "how many units can I sell?" If you can sell enough units, you are willing to do so for a low price per unit. Manufacturing is an increasing returns industry.

In resource extraction, the first question you ask is "what is the price of the resource?" For a high enough price, you will be willing to extract it. Resource extraction is a decreasing (or at best, constant) returns industry.

To say that there is no difference between a nation wanting to become wealthier by investing in increasing returns industries and decreasing investment in decreasing returns industries is to turn your back on not only the history of development but also current development policies globally. As well as math.

There is a huge difference.

[DavidN]

Stephen,

You talk about real incomes increasing, but where are those real incomes going to? Certainly not to labour specific to manufacturing e.g women, low skilled workers, people with mortgages who can’t move over to the other side of the country etc.

You don’t have to be 'for' manufacturing to be for intervention where Dutch disease occurs. In the case where sectors are geographically concentrated, Dutch disease causes two (or n-) speed economies. Provinces can’t manipulate currency, monetary policy is a blunt instrument, but you can use fiscal transfers. For crying out loud this is one of the advantages of having a political union (contra EU)!

Also, underlying all these discussion of DD is implicit the premise that intervention is sector specific. On the contrary, sector specific policies would be counter productive and exacerbate DD for all other sectors not receiving help. Not taking into account other issues (e.g. lower bound) the feds can reduce spending which allows central bank allowing easing of policy which puts less pressure on appreciation. In the long run, sovereign investment fund invested overseas (from resource revenue) would relieve pressure on appreciation helping all sectors, not just manufacturing.

[DavidN]

I’m for trade but I’m not blind to it’s distributional effects. If economists are going to rely on welfare theorems that says you can make everyone better off then you need to put theory into practice.

[Bob Smith]

Colin,

Its a misperception that countries like the UK, the US or Canada became wealthy because of manufacturing. By the time the industrial revolution started in the UK, it was already one of (if not the) wealthiest countries in the world, largely on the basis of agriculture. Ditto the US. Canada became a wealthy country despite an inefficient manufacturing sector protected by subsidies and trade barriers, largely on the strength of its immense natural endowments.

In any event, the trend in Canada isn't sharply different from that of pretty much every other industrialized country in the world. You mentioned Brazil - good example, since 1985 it's manufacturing share of GDP has fallen from more than 30% to less than 15%, all while becoming more prosperous (and democratic). Indeed we shouldn't be too surpised if Canada's share of GDP from manufacturing is falling, since the world's share of gdp from manufacturing has been falling steadily. Maybe planet earth suffers from dutch disease (damn martians buying our oil!)

[J.V. Dubois]

rsj: this may be true in real terms, like tons of steel or barrels of oil extracted - but it obviously is not true for the relative price of raw resources vis-a-vis manufactured goods (essentially labor used to produce them). This may rise without any further investment into the resource extraction. For instance the costs of extraction for one barrel of oil in Saudi Arabia is approximatelly $2.80. Saudis don't need to invest and innovate so they produce more barrels of oil for their export sector to rise. All they need to do is to sit back in their golden palaces and watch how global demand for oil does it for themselves. It is a completely different story for manufacturing sector where this kind of protection from competition generally does not exist long-term.

I am not expert in this, but this is also one of the reasons why I think that people do not like resource extraction economy. Resource extraction has different competition dynamics, it has a power to lock the society down into rent-seeking and power struggle over the rights for resources instead of innovation. Resource bonanza can be there long enough to completely change institutions in the society, make it more complacent and more vulnerable to shocks. Historical record of struggles between nations dependent on resource extraction vs nations with relying on value adding economy does not bode well for the former - as examples look at medieval Spain vs England or American civil war.

[Mike moffatt]

DavidN: who is doing anything of the sort?

[Patrick]

I think J.V is on to something. Having black gold flowing from the ground draws everyone's attention. People will (to their own detriment) fight over the rents rather than take the risk of doing something else. Kinda like fighting a war over a winning lottery ticket rather than just getting a regular job.

The oil sands are not the same story story as Saudi or Nigeria. It's not just a matter of drilling a hole and out pours 50K barrels a day (e.g. Ghawar in the 60's). Oil sands production is as much manufacturing as resource extraction. Google SAGD and you'll see what I mean. Those facilities look like factories to me.

Even if Canada is suffering Dutch Disease, it isn't clear to me that there's any reasonable policy response. Sure, AB could setup a Norwegian style fund with similar investment rules, but then it would have to substantially raise taxes to pay for the expanding services and infrastructure to serve all the people moving in. Why forgo your own present consumption to pay for others' future consumption? I doubt people will go for it. Perhaps the rest of Canada would be willing to pay a tax to AB to fund their future infrastructure demands when they finally move to Calgary.

[Bob Smith]

Patrick: "People will (to their own detriment) fight over the rents rather than take the risk of doing something else. Kinda like fighting a war over a winning lottery ticket rather than just getting a regular job."

Agreed, although that's as much a function of the weakness of the institutional arrangements of the affected countries as they are a function of the nature of resource wealth. The problems facing Nigeria or Saudia Arabia are largely a product of their governments (or lack thereof) rather than their mineral wealth (although control over that mineral wealth may reinforce bad government).

J.V. Dubois: "Resource bonanza can be there long enough to completely change institutions in the society, make it more complacent and more vulnerable to shocks. Historical record of struggles between nations dependent on resource extraction vs nations with relying on value adding economy does not bode well for the former - as examples look at medieval Spain vs England or American civil war."

Long standing industries of any sort can be vulnerable to external shocks, be they resource prices, technological chance (the Luddites weren't opposed to manufacturing, they were opposed to mechanized manuacturing that was destroying their traditional industries), cultural or policy change (think the collapse of the Chinese shipbuilding industry - then the world's most sophisticated - in the 15th century, or to use your example, opposition to slavery in the US north).

I'm also not sure I'd agree with the characterization of the US civil war as being a conflict between nations reliant on resource extraction vs. nations reliant on "value adding" economies since the economies of the North and the South were largely reliant on agriculture (albeit with the rather prominant distinction that one treated their workers as labour, the other as capital), with much of the US resource wealth located in the North. The ultimate success of the North (and, it was by no means a sure thing - Gettysburg is in Pennsylvania after all, rather north of the Mason-Dixon line, and much of the heavy fighting in the early-years of the war took place within earshot of Washington) was largely a function (a) population (at least in terms of people that either side might consider arming - the South wasn't keen on arming it's slave population), (b) control of the US Navy and Naval facilities (while the cream of the pre-war Army largely fought for the South, the US Navy consisted largely of Northerners - ultimately the South lost because the Union Navy managed to impose a total blockage on Southern ports), and (c) opposition to slavery in the UK and Europe (the US civil war aroused great sympathy in Europe for the South, both on principled and self-interested grounds. But for the reality that the South was fighting the war to maintain the institution of slavery, that sympathy may well have resulted in intervention - as it was there were significant tensions between the US and UK over the blockade of the South).

And while you're right that resource bonanzas can change societal institutions (for the worst), but they can also allows societies to preserve social institutions that they otherwise cherish. Again, it comes down to how well governed a society is and how they choose to use their resource wealth. Sure, there's no doubt that American gold was an economic disaster for Spain, but on the other hand it allowed an otherwise marginal state to punch well above its weight for 3 centuries or so (and to colonize much of the Americas and parts of Asia in the process) despite chronic and at times spectacular mismanagement. It's an open question as to whether resource wealth resulted in lousy government insitutions in Spain (it's worth noting that the economies of other countries sharing first Hapsburg than Bourbon governments weren't obviously more successful) or whether lousy government meant that it misused that resource wealth. The counter-example might be Norway, where its resource wealth arguably gives it a capacity to absorbs shocks that might otherwise undermine institutions that its citizens cherish (i.e., the social welfare state).

[Determinant]

Nice way to dance around history, Bob.

But it's historic fact that vast majority of American manufacturing capacity was in the North. The South had only one major iron works, Tedeagar Iron Works, in Richmond. It's also fact that the North leveraged that fact for every advantage it could get.

The Union Army was far better equipped and the difference by 1864 was telling. The Union Army started to deploy lever-action repeating rifles and achieve rates of fire the Confederate Army simply couldn't match.

And the Eastern Theatre stayed where it was because of the proximity of Washington and Richmond. Each army was trying simultaneously to defend its own capital and defeat the other army. Ultimately it was the North that prevailed through having a far greater manpower pool. Conscription wasn't introduced until 1863 in the North, in fact the New York regiments in the Army of the Potomac had to be shipped to New York City right after the battle to suppress the Draft Riots.

Further, Gettysburg demonstrates nothing. It was significant, but it was a jaunt, the Confederate Army cut itself off from its supply bases in order to make the expedition. It was not intended to be sustained, the plan, such as it was, was to threaten Philadelphia and force the North to sue for peace. It was no different than Antietam the year before, except the North had the better position after the battle.

In the Western Theatre, where the Union Army carried out a purely offensive strategy the scope of manoeuvre was far greater, ranging from Missouri down to New Orleans, through Mississippi and winding up in North Carolina.

By 1864 with conscription and solid leaders in the triumvirate of Grant, Sherman and Sheridan, the South was doomed. The Union Army was better fed, better equipped, better led and had more men. Grant beat Lee through attrition, he simply pummelled the Confederate Army without respite until it sued for peace at Appomattox. It even degenerated into trench warfare at Petersburg in 1864.

[rsj]

J.V., it is true even in terms of relative price, because as the price of one specific raw material goes up, substitution away from it and towards another resource occurs, so the price of the raw material, in real terms, doesn't exponentially increase:

http://www.angrybearblog.com/2011/02/prices-and-quantity-for-whale-oil-and.html

whereas productivity and output in the manufactured goods sector does exponentially increase, allowing for sustained exponential growth in living standards per capita per unit of labor exerted. What you are talking about is only valid if the number of goods is fixed.

Now if one nation had a monopoly on *all* resources, you could be right. They could demand an ever increasing share of output for the same unit of resource provided. That would allow for exponential increases in real resource prices.

As there is virtually an inexhaustible supply of different types of natural resources, and no nation has a monopoly on them all, the real price of any given natural resource is not going to increase forever. But the purchasers of energy can substitute from oil to coal in a way that a consumer cannot substitute away from a doctor to a banker. The real price of oil, for example, has not matched the growth in real output. Same for coal, etc. But medical expenses, educational costs, etc, those all are in a position to receive spillovers from increasing productivity of manufacturing and other increasing return industries (e.g. IT, entertainment, etc.).

There are long time series that do not bode well for nations desiring to build their economy on resource extraction for a few select resources rather than building their economy on increasing return industries. And the third world remains resource-rich but output poor.

[Mandos]

The analogy is so distant from reality it can hardly be called an analogy anymore. At some point, after omitting enough factors, an analogy becomes wholly unmoored.

Ian Welsh has a much better explanation of the dangers of the Dutch disease and the need for a value-added economy.

[Jacques René Giguère]

Bob Smith: not much to add to Determinant but
a)Gettysburg and Antietam weren't offensives ,merely large scale raids which, even if succesful, would have petered out because
b) the South, unlike the North, never mastered logistics, whether strategic, operational or tactical.
Their administration was always a shambles. They rarely used telegraph and railroad to advantage and always had difficulty gathering and expediting supplies, even things as basic to war as shoes and clothing. Which their resource-based economy could not manufacture...

[duncan cameron]

The issue of unemployment is uppermost in many peoples minds when looking at the economy. Accounts used by economists that assume ful-employment help understand how prices allocate resources efficiently, but have serious limitations. Excluding the costs of, say, 10 percent unemployment creates problems for thinking about policy options, for instance.
Policy-making predicated on full employment as a goal leads to looking at how money should be spent so as to create more jobs. Job multipliers vary by the type of expenditure: tax cut, or tax expenditure versus targeted subsidy, general increase in spending etc.
We currently subsidize the Alberta Sands. Does this make sense? From a job creation point of view, I doubt it.
Tom Mulcair argues that subsidies inflate profits in the sector, leading to increases in investment, and that the profits do no reflect externalities, costs to be assumed later. Is there anyone who disagrees with this view?

[Patrick]

The oil sands boom may have its problems, but it ain't lack of manufacturing or unsophisticated logistics. We're not talking about a unsophisticated agriculture using slave labor here. The analogy isn't even close. Getting to heavy oil from tar sands is a non-trivial undertaking. In-situ processes are essentially manufacturing facilities. Even in the strip mining operations, once the dump truck delivers the sand for processing it basically stops being mining and starts being a value-added activity.

If there was a shift from manufacturing widgets to manufacturing whatsits, would you have your knickers in a knot? Probably not. If it makes you feel better, think of it this way: AB is manufacturing heavy oil from tar sands.

[Jacques René Giguère]

Patrick: AB is manufacturing oil from a time-limited resource and selling it at above-cost, thus genrating rent in a not-very-efficient monetary union. I wish you to Live long and prosper in Vulcan,AB
http://en.wikipedia.org/wiki/Vulcan,_Alberta but the problems remain.

[Stephen Gordon]

The oil sands won't run out for 100 years or so, more if extraction technology improves. Any answer to "what do we do when the oil runs out?" we might come up with now will be obsolete when the time comes.

[Determinant]

But for the reality that the South was fighting the war to maintain the institution of slavery, that sympathy may well have resulted in intervention - as it was there were significant tensions between the US and UK over the blockade of the South).

That hoary old chestnut. It omits so many facts, facts that are the very reason Canada exists.

First, after the St. Alban's Raid (Confederates used Montreal as a base to cause mayhem in Vermont, like robbing a bank) and the Trent Affair, the Union was incredibly unhappy with British North America. Nevermind the fact that 38,000 British North Americans enlisted in the Union Army, forming whole New York regiments, the Americans were deeply suspicious and started to rattle sabres.

The British rushed 11,000 troops here in 1862. They landed at Halifax, took the uncompleted railway to Edmonston and then marched overland with sleighs to Rivere-du-Loup in winter. It was incredibly expensive for the British Treasury and they realized they didn't really want Canada anymore at that price. Further by 1864 the Union had a million-strong Army with the best weapons in the world and the most experienced leadership. The British told Macdonald and the rest of the political leadership in the Province of Canada that against that, Canada was undefendable. We were on our own.

The Fenian Raids of course helped, but what is also overlooked in history is that in 1866 the United States cancelled its Reciprocity Treaties with the Province of Canada and New Brunswick. It wanted to get back at Britain for being Perfidious Albion during the Civil War, but it put an end to a boom caused by Free Trade and redoubled by the Civil War.

Also overlooked is that Britain came very, very close to ceding Canada to the US in the 1870's. Hamilton Fish, the Secretary of State in 1870-71 flat out asked that Canada be ceded to the United States in settlement of the US outstanding war claims against Britain. Were it not that we were now a Dominion and Macdonald said to both the British and the Americans that cession flat out wasn't going to happen (willingly), we could have been written off in a stroke of a pen. The British no longer cared about North America and wanted out.

British intervention in the US Civil War? It was never going to happen and would not have mattered much if it did. The Union did not depend on exports to that extent could handle a British expedition. It wasn't 1812 anymore.

[Bob Smith]

Jacques/Determinant

Not that I want to hijack Stephen thread, but you guys just have your history wrong. Yes, the US north had manufacturing, so did Britain. The South had cotton that Britain wanted, the north didn't. As Stephen has pointed out on numerous occasions (on this blog and elsewhere) trade is a technology that can turn grain into cars and, in this case, cotton into guns.

Apart from the obvious, the North was bigger, the North won the war because, from the onset, it adopted a strategy of economic blockade to isolate the South from potential suppliers (aptly named the "Anaconda Plan"). During the initial years of the war, the Union navy was too small to effectively blocklade southern ports, so the South was able to export cotton (which it did en masse) and import weapons more or less freely (which led to a frenzy of buying in European arms markets as Union and Confederate agents snaffled-up anything remotely ressembling workable weapons - the Confederates were much more successful in this regard, acquiring some 400,000 top of the line British Enfield rifles, whereas Union agents acquired some truly strange weapons), but as the Union navy slowly grew it ultimately imposed a death grip on the Southern economy.

Yes, the North was better supplied than the South, but that wasn't a function of the North being a manufacturing economy so much as a function of the historical accident that the Union Navy consisted largely of Yankees. Had the Navy followed the bulk of the Army, the South would have had unfettered access to world markets, and the logistical advantages (to say nothing of the strategic freedom of movement aforded by control of the sea - the course of the War would have been very different if a Confederate army could have landed in Boston or New York, rather than a Union army landing in New Orleans) that allowed the North to grind the Southern armies down would have been significantly reduced.

The success of the North reflected its dominant naval position vis-a-vis the South, it's larger size, and the decidedly unfavourable optics of supporting the South, not the unique superiority of manufacturing economies versus agricultural or resource based economies.

"that sympathy may well have resulted in intervention"

Intervention doesn't mean war. The British might merely have turned a blind eye to some of the activities of some of their more excitable subjects (who spend time raising funds to purchase confederate blockade runners or confederate warships). They might have decided that maybe the ironclads (amongst other ships) being built for the confederacy weren't warships, but just "armoured merchant ships", and not seized them (as they did, famously, in 1863). Or maybe a Royal Navy Frigate just happens to "accompany" merchant vessals on route for Southern Ports.

[Determinant]

Bob, you're arguing against history.

The Army thing is a canard and you know it. You are referring to the United States Army, the Regular Army, which consisted of 11,000 men in 1861. The real army, the bulk of the actual men who took the field were the Militia/National Guard and the Volunteers, war recruits. Ulysses S. Grant and many more West Point grads like him were in civilian life in 1861, by 1863 Union Generals like Grant, Sherman, Sheridan and Thomas (a master organizer) had floated to the top. It took time.

We forget in this day and age that real armies, field armies, were only summoned to duty during wartime. That practice stopped after WWII.

Further, the Union didn't need international trade. The entire point that Jacques and I are making is that it the ingredients it needed for victory domestically: Enough men, lots of manufacturing capability, railroads galore, etc. I'm sure the Enfield's were nice, but the Union had the M1858 Springfield Rifle Musket, it didn't need to depend on the vagaries international terms of trade, it just needed to pump those out in bulk, which it did.

That's theory and speculation. It's not history.

The Union, as would happen in WWI and especially WWII, used domestic manufacturing capacity to out-equip, out-supply and out-gun the Confederacy. What won the day, which wasn't the Navy (though that helped) was that once the Union had large enough field armies it sent them directly into the Confederacy and eradicated both local resistance and supply to Confederate field armies. Sherman's March to the Sea was about devastating the last remaining significant supply area for the Confederate field armies, Georgia and the Carolinas. Lee's armies in the Eastern Theatre were starving by 1865 and Richmond held on by a single rail line. Once that was cut, it was all over.

[Shangwen]

Re the oil sands and 100 years: why does that matter? All resources are finite, either currently in practice or at a future time. We don't have enough time, capital, or people now do everything we want. We don't have a thousand years of oil sands. We can't turn lead into gold. There's an argument to be made that we have never run out of anything: as the resource approached supposed extinction, we developed substitutes to head off the presumed Peak X disaster. Are we currently still suffering from Peak Whalebone, Peak Horsehair or Peak Alabaster? We have a growing problem with drug shortages right now. I think the result of that will be some regulatory liberalization to make time-to-market faster. There may be some looniness in the alternative fuels sector, but it's arisen for reasons we've seen before.

[Determinant]

Speaking of trade, the entire point of the pro side in Dutch Disease posts is that trade, as a strategy, has shortcomings. Stop thinking micro, neither resources nor degrees of freedom of action are unlimited.

You want to see trade fail as a strategy? Two words: Lend-Lease.

[Mandos]

The oil sands won't run out for 100 years or so, more if extraction technology improves. Any answer to "what do we do when the oil runs out?" we might come up with now will be obsolete when the time comes.

That's a strawman, though. The oil literally running out-as-in-not-being-there-anymore is not the only problem with it.

[Livio Di Matteo]

On a completely tangential point, I found the above mention of Gettysburg interesting. Its economic development is an interesting example of path dependence. Until the American civil war, it was strategically located at the center of a set of roads and probably would have grown substantially during the post 1870 industrial period given its location.The battlefield park established around it changed its development forever and shaped it's long term development into a tourist center, war memorial and university town (Gettysburg College was established in the 1830s). I suppose random shocks can have transitory and permanent economic effects but long term effects require that the shock somehow be "institutionalized". If the battlefield park had not been established by government edict, after a period of rebuilding, Gettysburg's economic progress would probably have resumed from where it left off. Manufacturing and resource development in general are affected by short and long term market and economic events as well as public policies and institutional frameworks tha either speed or slow adjustment. On the other hand, it is late and I should probably go to bed. Good night.

[Declan]

Just wanted to note that I think J.V. Dubois and Jane Flemming make an important point above - that aside from concerns about depletion, pollution, wealth concentration, instability, network effects, etc., there are also potential ethical externalities to resource extraction. Capitalism relies on an ethical framework that includes a focus on productivity, innovation, efficiency and competition all of which are blunted in the case where you can just sit back and turn on the taps, Saudi-style* .

Even more fundamentally, resource extraction is a game of limits (to both the size of the resource to be extracted and to the rate it can be extracted) which is in direct opposition to the capitalist morality system which, as David Gauthier said, is a one word ideology and the word is 'more'. Take immigration as an example. In a manufacturing society where the only limit is demand, the more the merrier and full immigration is encouraged. But in a resource society, more people just dilutes the value of the resource to be extracted. If we need more people to extract the resource, better to import guest workers, pay them as little as possible, and then ship them out when we are done with them so we don't have to share our wealth (sound familiar?).

In 'The Protestant Ethic and The Spirit of Capitalism', Weber distinguished between the 'capitalist adventurer' (think Donald Trump) a speculator who had been around since time immemorial and the 'ascetic' capitalist (think Warren Buffett) type that emerged in Europe in the late middle ages and were a new phenomenon. It seems possible that a resource economy attracts rent seekers like Trump and crowds out value builders like Buffett and that this could work to our disadvantage.

* Patrick makes a good point that the oil sands are more of a cross between manufacturing and resource extraction than pure resource extraction, so with luck, that will mitigate these impacts in Canada.

[DavidN]

Have to agree with Determinent,

Navy or no navy, it’s a big advantageous have the productive capacity to build and supply your own armaments. The South by having to trade for most of it’s weaponry and ammunition was in an immediate strategic disadvantage to the North who had no such reliance. Even if the South had a capable Navy (unless they could finish the war beforehand) the Union could’ve outbuilt/purchased navy vessels over time ala Pacific Theatre WWII.

With respect to the resource curse/political economy arguments, I don’t think those are as cogent for a country with strong institutions like Canada. Any sector including manufacturing can give rise to rent seeking.

[Stephen Gordon]

Lots of people are missing the point: This is about how wrong it is to insist that exporting 'raw' oil/logs/wheat/etc is bad and that we should be "adding value" before export.

[Mandos]

Lots of people are missing the point: This is about how wrong it is to insist that exporting 'raw' oil/logs/wheat/etc is bad and that we should be "adding value" before export.

That point is not missed at all, for example, in Declan's post right there above yours.

[henryc]

So may we conclude it doesn't really matter what you export, whether it be raw materials or manufactured goods?

I'm curious what the research says on the subject, such as in

Hausmann et al. "What You Export Matters". 2006
Felipe. "How Rich Countries Become Rich and Why Poor Countries Remain Poor". 2010

I'm not an economist, and don't know if these articles settle the issue, but what I seem to read in them is that what a country exports has important consequences for its future.

[ianlee]

Very nice Op-Ed in Fin Post today by Philip Cross, former Chief Economic Analyst at Stats Canada.

"High is better" addresses some of these issues: http://opinion.financialpost.com/2012/05/22/high-is-better/

[The Keystone Garter]

Somewhere on a recent thread Determinant mentions Ontario's Teacher's Pension instead of industrial policy. MB's Ensis or Crocus Fund (one was okay) is a warning. It got a combined 80% tax break but invested in some truly horrendous companies, losing over 80% of investor cash. I drank their beverage company's caeser base and it tasted like paint and left me urinating blood I thought. If they tried it they would not have invested in it.
There is probably 500 years of tar. Again, without a way to lower CO2 emissions it is useless beyond the next few decades. GHGs are okay until about +2-4C at which point they are recognized by export market as a WMD. Instead of demanding control over provincial resources, shouldn't AB have made friends with a port Province? It seems that NEP made them screw themselves in response to being screwed by Ottawa. I'm glad exporting is a federal jurisdiction; means 45 years of PC rule is ruled by changing fed political winds. Even if you get through the BC reserves the NDP or Libs can kill the pipeline one day, investors should know...

[The Keystone Garter]

So, our rich and putrid have dropped the globe on AGW. Hopefully other nations will bail us out. In the future, if civilization survives AGW, the next test will be pandemics. A company like Steris will need to be grown 100-1000x. Actors like Lundin could help out too. They have a market cap of $2.5B but are sitting on $160B worth of copper. Do we just subsidize finance and whatever oil has turned into in the future, too? How many times do we drop the ball before someone takes away CAD purchasing power?
Obama just gave a speech from a carbon-composite wind turbine blade manufacturing plant in Ohio. I'm pretty sure AB can make wind turbine composites with one of their petro-fractions...

[Mandos]

That Philip Cross article is nonsensical. There is an assumption he unsubtly slips in: that it is infinitely possible to "move up the value chain" to avoid competing with low-wage jurisdictions in Asia. It is not. Eventually these low-wage jurisdictions will be doing high-skill jobs for...low wages. The only way to defend against that is ultimately to, well, defend (protect) against it. If Mulcair is at fault for anything, it is in not emphasizing this truth.

[The Keystone Garter]

Mandos, that is false. China, at least E.China, is losing industries to nearby poorer nations. And you get even higher-skilled jobs (and steeper tax rates and better education) to compete. Consider: volunteer candy striper (free), nursing aide ($9/hr), licensed practical nurse ($12/hr), Registered Nurse ($20/hr), RN supervisor ($25/hr), doctor ($35/hr), surgeon ($40/hr), brain surgeon ($55/hr), microbot artery scraper ($75/hr), robotic particle beam tumour melter computer programmer ($85/hr), nanobot biosensor engineerer ($100/hr). Last 3 don't exist yet.

http://www.futureoftech.msnbc.msn.com/technology/futureoftech/liquid-batteries-pour-green-energy-157866#
Future is near. A battery like this would allow wind solar and other green sources to power the world. Only hydro would be able to compete on GHG grounds. This would enable the world to get University degrees and the problem would be what not to build. We don't know which metals will enable lowest operating temperature, this one uses antimony and magnesium. Western Premiers are meeting abour N.Resources, but need R+D to determine which metals are the winners here, 1st. I suggest raising corporate taxes for finance and petro and offering and exemption for this type of battery R+D. They suggest solution-phase batteries will win if temperatures are low enough. We are a big country, presumably we can find a winning alloy if we try. The market is very large and permanent.

[Tim]

I am coming to this thread a bit late but I'll make a few comments:

One is I am not sure Canada is suffering so much from Dutch Disease as it is undergoing a shift from the traditional branch plant/auto pact economy towards new sectors ONE of which is petrochemicals/synthetic fuels. Others would be things such as Aerospace, confectionary, aluminum smelting, mining, and different parts of the service sector.

Second I am not sure anything can or should be done to mitigate the "fall" of the old branch plant economy. Given the "auto pact" model accepted US interests making all the final business decisions I am not sure anything can be done in the current economic climate to prevent US managers from moving production back south of the border. In an industry such as Aerospace where even the "foreign" owned players such as Bell Helicopters Canada and Pratt and Whitney Canada by international convention have their Canadian made products certified on a worldwide basis by Transport Canada I suspect Canada has more long term leverage. Something like the Bombardier C-Series is far more of national achievement than anything the branch plant economy ever delivered.