Those Who Forget History

From today's Globe and Mail:

In the decades prior to 2000, Canada made progress in moving away from being an economy of resource extraction. By that year, as labour economist Jim Stanford has pointed out in an analysis for the Centre for Policy Alternatives, well over half of Canada’s exports consisted of an increasingly sophisticated portfolio of value-added products in areas such as automotive assembly, telecommunications, aerospace technology and more.

But in the past decade, the clock has been turned back. Because of a boom in the oil and gas sector and a range of other factors, the economy has reverted toward being a staples-driven enterprise. 

But were things really so great back then? What were people saying about the low dollar and manufacturing? I decided to have some fun with LexisNexis and CBCA.

 

Dollar woes a mixed blessing? (CIO Canada - March 2002)

And with one U.S. dollar worth more than $1.60 Canadian, companies south of the border may be tempted to shop around. "This makes Canadian companies cheap, which will result in a flood of American takeovers," D'Cruz said. "That's not healthy because we will be converted more and more to a branch-plant economy, an economy where the strategic decisions are made in the United States."

 

Ownership and control of business under siege? The BCNI says that Canada stands to lose a good dollop of quality jobs to foreign markets (Globe and Mail - October 4, 1999):

"The combination of a weak currency, high corporate and personal taxation and policies and regulations that restrict growth and diminish the value of Canadian equities are leaving many major Canadian enterprises highly vulnerable to foreign takeovers," said the BCNI in a Sept. 15 memo to the Prime Minister. "A low Canadian dollar does help exports, but it also cripples the ability of Canadian companies to recruit top talent and makes it more difficult for them to grow through acquisition rather than being acquired."

Coming from the BCNI, this is equivalent to an emergency call to 911. Canada "faces an accelerating loss of key head-office functions and the high-paying jobs that go with them. . . . Recently announced acquisitions, mergers and strategic decisions demonstrate that this process is already under way and . . . we believe that many more such moves are possible in the months and years ahead."

 

Big trade surplus is actually a deficit (Toronto Star - July 9, 1995)

In 1993, according to James McCormack, an economist with the international trade department and author of the study, Canada reported a $ 19.5 billion merchandise trade surplus with the United States.

But when imported parts and components used in those exports are taken into account, Canada actually had a $ 4 billion trade deficit.

Canadians simply do not make a lot of the high-value parts and components - the black boxes - that are at the heart of many manufactured products.

That's why, McCormack says, "trade statistics can be misleading in terms of the contribution of trade to the domestic economy."

In 1993, when adjustments are made for imported components, merchandise exports accounted for 22 per cent of Canada's gross domestic product in 1993, not the 26 per cent the official statistics suggest.

McCormack's findings, while troubling, are not surprising.

What they show is that there is little vertical integration within the Canadian economy - little interaction between companies here. Instead, Canadian companies are often assemblers or suppliers to the U.S. economy; to a large extent, a century of U.S. ownership of much of our industry has produced a branch plant economy.

 

This one is neat - shows we've been having the same arguments for decades. Five-point plan unveiled Pressing multinationals key to recovery: NDP (Globe and Mail - February 19, 1982):

In an interview, Mr. Broadbent argued the roots of structural imbalance in the economy date back to the end of the Second World War, when Canada eroded its strong industrial base amd turned back to its traditional dependence on resource-based growth and exports.

The manufacturing sector was developed on branch plants which were to serve the domestic market, but the branch plant economy did not do enough of its own research and development or pursue export markets.

'What we have seen coming upon us in these last half dozen years, during the whole (Prime Minister Pierre) Trudeau period for that matter, is the crumbling of the twin pillars.

'Other countries have been selling resources and so we have competition there and there have been some layoffs in the resource sector... But ... the manufacturing sector, even in the limited terms in which it thought it was to be able to perform, namely the domestic market, has been undercut by competition."

Mr. Broadbent said it is not too late to turn the situation around.

'That is the decisive attitudinal question I'm concerned about. What we have been lacking from (Mr.) Trudeau from 1968 on has been the political will."

He chastised the Liberals for their plans to promote development of resource projects and to emphasize resource exports. 'It may keep the dollar at a higher level but it perpetuates the situation."

Dependence on imports for manufactured goods leaves Canada locked into the U.S. economy and without independent room for manoeuver during a recession, domestic stimulation only promotes imports, he said.

And unlike industrial development, large scale resource projects tend to provide immediate jobs in construction but few long-term jobs, he argued.

 

And finally, from the 1970s: Adding value (Globe and Mail - January 27, 1978):

For the past generation, however, manufacturing has been in a relative decline as an employer. The industry's share of total employment dropped from 26 per cent in 1949 to 20 per cent in 1977, while its proportion of real domestic product dropped from 27 per cent to 22 per cent.

Perhaps the major reason for the relative decline of the manufacturing sector can be attributed to its international trading performance, said Mr. Peters. For a variety of reasons such as rising labor costs, lack of innovation, the failure to upgrade domestic resources, injurious exchange rate policies, the impediments faced in a branch plant economy and the lack of public incentives to overcome all of these obstacles, Canadian manufacturers have experienced increasing difficulty exporting finished products and competing with imported products in their own domestic market.

 

There's your historical context for the morning.  There are hundreds of these articles out there. Could easily waste a day or two going through them all.

[Edited to add] I really need to stop going through these articles.  I can't help myself, though.  Here's a Canadian Business piece from February 1979:

The advent of smaller, lighter cars indicates that the auto industry is about to undergo a technological revolution that will cost the industry in North America about $60 billion in R&D funds. The question arises concerning the extent to which the Canadian "branch-plant" auto industry will share in this bonanza. It appears that the U.S. auto industry is going to get the major share of the benefits, while the Canadian segment will just get the "crumbs". As a result of the 13-year-old U.S.-Canada auto pact, the high technology segment of the industry, with its potential for creating new jobs and investment, is increasingly centered in the U.S., to the exclusion of Canada. The Canadian industry is playing an increasingly menial role in auto production, with the choice R&D jobs going to the U.S. Canada appears to be in a vicious circle; their unskilled workforce will not attract high-technology industry, but without such industry, skill levels cannot improve.

 

Comments

[CBBB]

But were things really so great back then?

I'm not sure that anyone is arguing that things were SO great back then - I think the argument is that the economic path away from resource extraction is a better one. I tend to agree - is basing this country's entire economic foundation off a couple provinces in the west really such a good idea long-term? If you look around the world how many resource-based countries are there that you'd want to emulate? Maybe Australia is the only one out of the bunch that looks good but the governments refrain that it wants to turn Canada into an energy super-power makes me think that their role models are Saudi Arabia, Venezuela, or Angola.

[ianlee]

CBBB states ""is basing this country's entire economic foundation off a couple provinces in the west really such a good idea long-term?""

See Canada’s Natural Resources – Now and for the Future

Natural resources – our forests, minerals and metals, and energy – are fundamental to the daily lives of Canadians. How Canada harnesses and uses these resources has a significant impact on our global competitiveness, the health of our environment and our overall quality of life. The natural resources sectors and earth sciences industries have been an engine of economic growth and job creation for generations. In 2009 alone, the sectors generated 11 percent, or $133 billion, of Canada’s gross domestic product (GDP) and directly employed close to 759 000 people

If understand NR Can and Stats Can on which these numbers are based, ALL natural resources industries accounts for 11% of GDP - which suggests 89% of GDP is derived from NOT natural resources.

This seems to contradict CBBB who suggests we are basing the ""this country's entire economic foundation"" on resources.

[Simon van Norden]

When the world prices resources at a premium at to manufactured stuff, we export more of the relatively expensive stuff and import more of the relatively cheap stuff.

When it prices manufactured stuff at a premium to resources, we use the same strategy. I think Ricardo called this "comparative advantage."

Over the past 50 or so years, we've seen a few of these "resource" price cycles. And we've seen the Canadian economy shift resources accordingly. (Remember how Alberta land prices fell in the '80s? and the western banks that went bust?) The ability to do so sounds like a very valuable real option to me.

[Alex Plante]

Since 1970 the CDN dollars has been on a wild roller-coaster ride between 60 cents and a dollar. Both PPP and the variation of the current account deficit with the dollar suggests that the exchange rate should be around 80 cents. I think what we need is a flatter roller coaster, maybe with the dollar fluctuating between 70 and 90 cents, instead of between 60 and 100.

[hosertohoosier]

Canada's relative performance has tended to be best during resource boom periods. If you look at real GDP per capita in Canada and the US since 1969, you get some distinctive periods of convergence and divergence:

1969-1981: convergence (the US-Canada gap as a % of real GDP per capita was 22% in '69, and 10% in '81)
1982-1996: divergence (gap peaked at 27% in 1996)
1997-2011: convergence (gap shrunk to 18% in 2011, lowest level since 1989)

So maybe there is a case for being coureurs de bois.

[Bob Smith]

"If you look around the world how many resource-based countries are there that you'd want to emulate?"

Australia, you mentioned, how about Norway? And of course, outside of the developed world, not every resource based economy is a basketcase - south of Angola you have South Africa (it has other problems, but they're not obviously linked to being a resource-based economy), and for every Venezuala there's a Peru, Chili or Brazil. We focus on the oil economies of the Middle East as being basketcases (and they are), but let's face it, most countries in the middle East are basketcases regardless of how much oil they have (are Saudi Arabia, Iran and Bahrain, for example, clearly more disfunctional than, say, Syria, Egypt or Jordan?). You might almost think that the dysfunction of the Middle East has some other common source.

Mineral wealth can be a curse for countries with weak, corrupt or crumbling governments and institutional structures, no doubt, but I wouldn't describe Canada as such a country.

"is basing this country's entire economic foundation off a couple provinces in the west really such a good idea long-term?"

Ask a westerner that question and they'll tell you that us Ontarians sure thought that basing our country's entire economic foundation off a couple of provinces was a good idea when those provinces were Ontario and Quebec (the National Policy, NEP, etc.). In any event, I think that ignores the reality that most Canadian provinces still have healthy endowments of natural resources. Quebec is pursuing it's Plan Nord to develop the resource wealth of Northern Quebec, and Ontario is busy developing the "Ring of Fire in Northern Ontario. While the Ontario and Quebec governments like harping about "dutch disease" (hey, it's easier to blame Alberta than to take responsibility for their own failed policies), they're sure pushing mining development for all its worth.

[Bob Smith]

I guess the other point is that the prejudice against a "staple-driven" economy is a decidly irrational one which reflects the prejudices of 19th century Victorians (and Georgians) enthused by the industrial revolution (and "progress") and the ideological prejudices of marxists and their descendants fixated on a Hegellian view of history ("we cant' go back to being hewers of wood and drawers of water, becuase the next step is supposed to be that the industrial proletariat overthrow the capitalist system"). It's not clear what basis there is for asserting that manufacturing cars is somehow different or better than "manufacturing" pigs, wheat or oil (to name some of Canada's leading exports over the years - it's been a while for pigs and wheat).

[Patrick]

Seems to me to be just plain wrong to say that resource extraction necessarily implies a decline in manufacturing. I get the impression that people think about it as if there was a central planner choosing between assigning labour to build widgets vs. assigning labour to dig-up the oil sands with shovels. Modern resource extraction uses tons of manufactured stuff (not just shovels and picks). Been to fracking lately? Seen a modern drill rig? SAGD facility? Somebody manufactured that stuff. And probably some of it was made in Canada.

[genauer]

@ Alex Plante
currency variations between 0.6 and 1.0 are not unusual,
see http://www.slideshare.net/genauer/currencies

One solution is, that you built a couple of factories close to your customers, smoothing the prices with the wages

Another one was a currency union, which actually worked not so bad, before it became the Euro : - (

For Canada building a sovereign wealth fund during the good years now, is certainly helpful.
Wanna buy some Euros ?

[Bob Smith]

"Wanna buy some Euros?"

No, but we might give the Germans a good price for Greece.

C

[BrianH]

Mike Moffat: 32,363 tweets and counting. How many have led to increasing employment?

[Determinant]

South Africa counts as developed, Bob.

You can't use the National Policy to support your argument either, it was predicated on Western development, built a railway that enabled western development, and when westerners did get their southern connection instead of the CPR, the Northern Pacific and the Great Northern Railway both matched the CPR's rates from Winnipeg.

Saudi Arabia, Iran and Bahrain, for example, clearly more disfunctional than, say, Syria, Egypt or Jordan?).

Bahrain does not have much oil. It is also known as the Las Vegas of the Arabian peninsula and has a high degree of freedom for the region. The Shia/Sunni clash is their Achilles Heel, though.

I am pleased to see that this article in the Globe and Mail:

http://www.theglobeandmail.com/globe-investor/personal-finance/rob-carrick/a-29-year-old-on-the-difficulties-of-landing-a-career-building-first-job/article2434807/

could have been written be me, but wasn't. Props buddy, we're all in this together.

[J.V. Dubois]

CBBB: I think there exists a possible compromise between resource extraction and long-term growth for value added production - see Norway. They invest export surpluses via sovereign funds all over the world simultaneously reaching two goals:

1. Being able to finance more costly health-care and social security programs in future
2. Preventing shocks from sudden changes in the price of mineral resources on domestic economy in terms of inflation or high volatility of exchange rates.

And there is also a "moral" story behind some version of forced savings by governments - resources will not be there forever therefore it makes sense to spread gains over several generations.

[Bob Smith]

Determinant,

Where'd you learn Canadian history? The National Policy was one of the first sources of what we now call Western Alienation. Put up tariff barriers to protect eastern manufacturers from world price - at the expense of consumers - particularly western farmers (who might otherwise have preferred to buy cheaper manufactured goods from the US or UK). . All the while expecting western farmers to sell at the world price for their products. Hardly an exercise in western economic development.

[DavidN]

I wouldn’t rely on Australia as a case to support doing nothing as we’re in the same boat. Chinese demand for iron ore and coal are driving the exchange rate up which is equivalent to a shift upwards in demand curve for iron ore/coal but a shift downwards (not due to change in exogenous factors like consumer preference) for all other exportable goods (e.g. education, agriculture, tourism, manufacturing). Dutch disease (model set out in Corden and Neary (1982)) is causing structural change in the economy and is increasingly becoming a political issue because manufacturing is getting hammered in Victoria and NSW while the resource States, WA and QLD, are booming.

Clearly, the resource boom is a aggregate economic gain, but the political issue is the gains from the boom are concentrated in the resource sector, while all the losses are in the other exportable sectors. Now if mining and manufacturing are concentrated in different geographic locations obviously there's is going to be a bit friction.

That doesn’t mean to say the only response available are 'beggar thy neighbour' policies. You can set out an sovereign wealth fund drawn from resource revenue to invest overseas ameliorate the exchange rate appreciation. Has the advantage of helping all the export sector rather than a targeted/specific program that would be distorting and/or subject to rent seeking problems.

[Determinant]

Determinant,

Where'd you learn Canadian history? The National Policy was one of the first sources of what we now call Western Alienation. Put up tariff barriers to protect eastern manufacturers from world price - at the expense of consumers - particularly western farmers (who might otherwise have preferred to buy cheaper manufactured goods from the US or UK). . All the while expecting western farmers to sell at the world price for their products. Hardly an exercise in western economic development.

It's detailed quite well in the new, definitive biography of John A. McDonald by Richard Gwyn. You're engaging in a bit of anachronism and I'm flat out challenging your viewpoint, which happens a lot in history. Prairie development wasn't possible before the CPR, that's why the thing was built (with Eastern money).

The first instance of Western Alienation was the West's desire for North/South rail connections so they could have cheaper shipping costs and access to Chicago. But Mcdonald has promised the CPR a monopoly between its line and the US border and so Mcdonald constantly disallowed provincial railway legislation in Manitoba. Eventually the CPR gave up its monopoly in c. 1889, but it didn't do much to change shipping rates, the NP/GN didn't undercut the CPR at Winnipeg.

The National Policy was proposed in 1878, before the West was settled in bulk.

Second, the US levied tariffs on Canadian wheat imports, our primary market in NP days was Britain. The US had their own wheat farmers.

It's also clear point of history that Western agricultural development was a key part of the National Policy, the other two legs being the CPR and manufacturing tariffs. The NP was a response to the Long Depression, tariffs were the acceptable way to discuss government economic intervention in those days.

[hosertohoosier]

^
I don't think he's talking about the west as it is currently imagined. Obviously there was virtually nobody living in Rupert's land in the 1870s. But farmers and lumberers in Ontario - the resource extracting forebears of the modern west - were more opposed to the National Policy than anybody else. Here's a geographic map of the 1878 election in Ontario. Obviously it was a good year for the Tories, but it's clear that they were winning the more established manufacturing areas in Hamilton and Toronto: http://canadianelectionatlas.blogspot.com/2011/05/ontario-federal-election-maps-1867-1911.html

And it's pretty clear that once the west was settled, the national policy was not popular. The best evidence of that is to look at the reciprocity election of 1911. Although it was a losing election campaign for the Liberals, they swept Alberta and Saskatchewan. They didn't win many seats in Manitoba (despite winning 45% of the vote), but they increased their support there, despite a losing national campaign. Manitoba, it should also be noted, had much more manufacturing, and thus gained more from the east-west national policy.

Wheat, you are right, is a bit different because the Americans farmed it, so there wasn't huge potential for north-south trade. Most wheat was exported to Britain, and later, the Commies. But you miss another important element of the demands of farmers. Western farmers desperately wanted access to superior American farm implements, because the Canadian or British alternatives were awful. When the Progressive Party was launched - sweeping the west - it too campaigned on a major reduction in tariffs, particularly for that reason. William Lyon Mackenzie King successfully bought off the support of a lot of Progressives by lowering tariffs on US-made farm implements during his tenure as Prime Minister.

I suspect part of the reason for the disagreement is that your thinking comes out of Gwynn's book on John A, whereas Bob is thinking more about the national policy beyond Macdonald's life.

[Peter T]

Economists look at total income. Ordinary people are often as concerned with distribution and with the types of life different kinds of work facilitate. Just as office work has more prestige than manual work, so manufacturing, with its ladder from unskilled to skilled, and its associated possession of crafts which are offer some autonomy from employer demands, is seen as more desirable than farm labour. This was one of the great drivers of policy in the settler colonies - no politician in Canada, Australia or NZ could afford to offer voters what they saw as a future of servitude. It's only when the social focus shifted from what people produced to what they consumed that this attitude weakened. Incidentally, it was also one of the drivers of the surprising strength and resilience of communist rebellion in places like the Philippines and central America - the hunger of peasants for a future in which their children could be engineers.