Resources and the Economic Future

Well, it was one of those interesting coincidences.  Natural Resources Minister Joe Oliver unveiled new figures generated by Natural Resources Canada that apparently demonstrate that natural resources account for almost 20 percent of economic activity in Canada.

According to the press release (I have not been able to track down the actual study aside from another press release on methodology): “There are currently over 600 major Canadian resource projects planned over the next 10 years or underway representing approximately $650 billion in investments,” said Minister Oliver. “This is a more accurate picture of resource related investments from a year ago, and represents an unparalleled opportunity for Canada.”

Meanwhile, almost simultaneously on the other side of the planet, the Australian Prime Minister Julia Gillard was countering the views of her Resources Minister Martin Ferguson, who last month declared “the resources boom is over”.  However, Gillard also declared that the resources boom – in particular Chinese demand for Australian resources – was “now passing” but that “Reports of the mining boom’s death have been exaggerated”.  Even the head of the Australian central bank has chimed in saying it was too soon to call an end to the boom.

Mining projects in Australia have been slowing down because of the depressed economic conditions in Europe and America as well as slowing economic growth in China.  An iron ore project had a deferral announced on the day Gillard made her comments while the previous month a planned expansion of a copper and uranium mine was halted.   There is a lively debate in the Australian media over whether or not the resource boom is indeed ending and whether or not this will end the remarkable Australian economic boom.  Apparently, the Australians have been enjoying their resource induced economic growth and unlike Canada have not been fretting as much about Dutch Disease despite an appreciation of their currency.

While it can be argued these new figures from Natural Resources Canada are really designed to buttress the Federal government’s western pipeline project and oil sands development, they are also useful ammunition against Dutch Disease proponents.  Of course, from the viewpoint of an economic historian such as myself, having the government come out and present a case for the importance of natural resources to Canada’s economy seems unnecessary.  After all, the Staples Thesis is a Canadian contribution on how resource extraction makes contributions to direct and indirect economic growth. 

In the nineteenth century, resource intensive production (including agriculture) contributed a much larger share of the domestic economy than today.  Yet, there has been constant debate as to the relevance of resources to the Canadian economy even amongst economic historians.  A great article on the role of resources in Canadian economic growth is Ian Keay’s “The Engine or the Caboose? Resource Industries and Twentieth Century Canadian Economic Performance”  in the March 2007 Journal of Economic History. 

Keay asks the counterfactual question: “What would twentieth-century Canadian real GNP per capita have been in the absence of any resource extraction or processing activity?” He finds:  “In the absence of resource-intensive production, the counterfactual exercise indicates that real GNP per capita would have grown at virtually the same rate that is observed in the actual data: 2.07 percent versus 2.01 percent per year, respectively. The exercise also reveals that the level of real GNP per capita would have been substantially lower throughout the century in the absence of resource-intensive production. The average ratio of counterfactual to observed real GNP per capita is just 0.823. The resource intensity of Canadian economic activity during the twentieth century, therefore, does not appear to have slowed domestic growth, but it does appear to have made a fairly dramatic positive contribution to the level of income enjoyed by the average Canadian.”

A ratio of 0.823 is pretty close to saying natural resources contribute 20 percent to the economy.  It would appear that the 20 percent estimate has been pretty much a constant for the last 100 years.  Natural resource exploitation is important to our standard of living and in its absence, not only our economy would not have grown any faster, but the size of our economy would be smaller as would our per capita GNP.   

The denigration and criticism of the resource sector in Canada is partly rooted in the discomfort many of our thinkers and opinion leaders have with the fact that so much of our activity is rooted in extraction as opposed to the supposedly more sophisticated value added activities that are seen as the hallmark of an advanced economy.  The rise of the so-called new economy in the 1990s lead to repeated mantras about the end of rocks and trees and the dawn of the information age as the new economic driver. Yet, borrowing from Kenneth Carter in a different context, a buck is a buck no matter where earned. 

Moreover, if one examines modern mining, agriculture and forestry, it appears that modern natural resource exploitation is also quite capital and knowledge intensive and no longer a bastion of unskilled labour. Of course a slowing international demand for resource and mineral products could affect projected mining development in Canada – particularly in Ontario’s “Ring of Fire” and northern Quebec.  If there is a slowdown in the demand for resources and drop in commodity prices, there definitely will be a negative economic impact on the Canadian economy.  In the absence of our resource sector, we will not effortlessly glide to a new set of shopping and dining experiences fueled by new age value added industries.

Comments

[Michael Hollander]

would it not throw everything off if you could show that your population would have been much smaller (probably true?) without resource extraction?

[Livio Di Matteo]

Michael: Probably correct if we are just talking about the 20 percent share of total GDP. However, according to the Keay article the average ratio of counterfactual to observed real GNP per capita is just 0.823. Thus, he finds a significant contribution of natural resources to per capita output. It is per capita output rather than the total size of the economy that is the better indicator of individual benefit and welfare.

[Chris J]

"Natural Resources Canada that apparently demonstrate that natural resources account for almost 20 percent of economic activity in Canada."

Where is the box drawn? Even the keyboard I am typing on is plastic which is petrochemical which is oil extraction. But less flippantly, is the person who works at the Sudbury smelter working in natural resources? They aren't mining. The heavy equipment mechanic or electrician underground?

What about the company that buys forklifts and ruggedizes them for use underground and sells them to Vale? Manufacturing or natural resource sector?

I guess what I am saying is the 20% number surely tells you more about your /definition/ of the natural resources sector than anything else.

[Stephen Gordon]

I can't figure out why oil sands upgraders are in the "mining, quarrying and oil and gas extraction" NAICS codes, while oil refineries and smelters are in manufacturing.

[Richard Tsukamasa Green]

I'm interested in the amount of Dutch Disease fretting in Canada is Australia looks sanguine by comparison

[Mandos]

Yet, borrowing from Kenneth Carter in a different context, a buck is a buck no matter where earned.

Except, it isn't. One way of earning a buck has a different set of consequences for our social future than another.

[JP Koning]

Macdonald and Baldwin's recent paper touches on this theme:

http://www.statcan.gc.ca/pub/11f0027m/11f0027m2012079-eng.pdf

"From 1870 to 2010, the cumulative growth in the volume of real gross national income (GNI) due to trading gains is 18% larger than the more common measure of production, gross domestic product (GDP). The pattern is one of a long, initial period of positive growth in the gap between real GNI and real GDP from 1870 to 1920. This was followed by spurts of growth associated with the two world wars that were partly, but not fully, offset by subsequent reversals. The 1970s and the post-2000 petroleum and resource boom continued the long-term trend of an increasing differential between real GNI and real GDP."