The manufacturing trap

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.

Here is a graphic representation of the staples trap taken from The Bitumen Cliff (here I must give credit to one of my students, who used the French version in a blog post): 

 

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 hiring 1,000 people for Oakville assembly plant:

[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.

Comments

[Joseph Savon]

"What strikes me about this is that there's nothing in here that is specific to staples." Indeed. Surely we may substitute "Widgets" or any other limited category. Diagram looks more like a MonocultureTrap or InflexibilityTrap
BUT
if specialization is a "trap", doesn't this cast doubt on the notion that a nation should concentrate resources only on industries where it had a comparative advantage, that is, in those industries in which it has the greatest competitive edge?

[Nick Rowe]

I see your point about manufacturing meeting the same test. (And why do they hate wheat farming so much anyway?)

I'm wondering what policy recommendations, if any, the Staples Theory leads to?

Here is Andrew: "But Canada may very well ending up needing a Plan B to create new sources of comparative advantage. This will demand serious reflection on how to build a more technologically sophisticated and innovative economy capable of creating high quality jobs in internationally competitive sectors."

It all sounds very nice, but what does it mean? Who does this, and how do they decide, and how do they implement it, etc.? And if you create a new source of comparative advantage, mightn't that mean you destroy some old source of comparative advantage at the same time? Almost by definition of comparative advantage.

Waiting to hear about "value added".

[Stephen Gordon]

I bet it means subsidising well-connected firms.

[Lorenzo from Oz]

Sounds like "the resource curse" or "the Dutch disease".

{Snark on} Yes, it's what has kept Canada and Australia so poor and enabled our economies to deal with the Great Recession so badly ...

Oh, wait, they didn't. {Snark off}

The answer is floating exchange rates and sensible monetary policy and then run with what comparative advantages you have. Not so hard, really.

Australia fell hard for "the manufacturing trap" in the Deakinite Settlement (pdf). Really, it was standard scarce factor/plentiful factor stuff. Australia (and New Zealand) imported capital and labour but had lots and lots of land, so labour and capital got together and imposed protection on land. But all policy regimes need a good story to justify themselves.

We have done (comparatively) rather better since we started dismantling the system and loads better since the RBA changed its policy target in 1993.

We have the foreign ownership/foreign debt worry too. But why we would be expected to stop being capital importers is a bit mysterious.

[Nicholas Shaxson]

"Dutch Disease" is just one aspect of the "Resource Curse" which as Stephen Gordon correctly points out is the better-known name for the 'Staples Trap.' This is interesting. One can make an argument - though in my opinion more so - about dominance by the financial sector. Most of the things you describe here, the lobbying and so on; the vulnerabilities to changes in the global economy - are applicable. One might call it the Finance Trap or the Finance Curse, perhaps. http://www.taxjustice.net/topics/finance-sector/finance-curse/

[Robert McClelland]

"These are not high-paying jobs: the median wage in Canada and in Ontario is somewhere north of $20/hour."

For people without post secondary education $20/hour is a high paying job.

[Livio Di Matteo]

Rather than "staple trap" or staples theory which is focused on a natural resource export, you would want to use the framework of export-led growth or perhaps the Corden-Neary booming sector models. Such a framework would be applicable to either oil or manufacturing allowing for the export(booming) sector and non-export sector and allow you to trace out the adjustment properties across sectors in response to increases or drops in demand for the output of the export(booming sector). The booming sector models by Corden/Neary in the 1980s are considered the classic "Dutch Disease" models. However, the framework is equally applicable to sectors that are not resource extractive. You might want to look up: W.M. Corden (1984) "Booming Sector and Dutch Disease Economics: Survey and Consolidation" Oxford Economic Papers, 36, 3, 359-380.

[Stephen Gordon]

Thanks, Livio. Will do.

[Miguel Madeira]

I think that the main difference between staples and manufactering is that a country could change what products to manufacter, while it is more difficult to change a specifical pattern of specialization in extraction of natural resources (or, in other words, the supply of manufactered products is usually more elastic that the supply of natural resources).

[Joseph Heath]

One little question for you economists, slightly tangential to the topic at hand. I was struck by this line in the quote from Andrew Jackson "foreign ownership is high (about one half of assets) meaning that profits are lost to Canadians". You often hear, as an argument against foreign ownership, that it means "profits" get sucked out of the country. (The background is that Marxists used to talk this way, because on their view international trade and investment was motivated by the need to extract "surplus value" from poor countries.) But it's always struck me as suspicious, partly because the profits are earned in Canadian dollars, so it's not like trucks full of bullion are being driven across the Ambassador Bridge at night, it must interact with trade. But a lot of economic nationalism seems to me to presuppose something like the "bullion at night" picture (or, "why pay your landlord's mortgage, when you could be paying your own?"). A clear and accessible explanation of how this all works would, I think, be useful to many people.

Also, to second Miguel -- a lot of people do mention price volatility, not just price level, wrt staples. No idea if the data support that claim though.

[Patrick]

Joseph: Disclaimer: I'm not an economist. I think part of the answer is that Canadians are people too. We can own shares in foreign companies, and perhaps it's a better deal for us to do so and let others own stuff in Canada. Also, it could be that Canadians don't have the money to own all the firms that want to operate in Canada, so if it wasn't for foreign ownership we'd forgo all the economic activity we couldn't finance ourselves.

I've been watching an old BBC documentary on WWI, and ISTM that economic nationalism has very sinister roots in 'total war'. If a country might at any point set out to obliterate another country completely, and thus needs all it's industrial capacity working to that end, it matters who owns all the stuff - though in the limit I never understood why the Gov't couldn't just come along and take all the factories and shipyards. It's not like the foreign owners could do anything about it.

[Kailer Mullet]

Great post. We hear this a lot in Alberta. We are constantly being told we need to diversify our economy, as if all that entails is going down to the basement of the Legislature and pushing on the diversity lever. The fact is we are a landlocked province far from markets. It doesn't make sense to make stuff here and then pay to have it shipped. Alberta will never be anything, but a resource based economy. If, God forbid, we find an alternative for fossil fuels, then the sensible thing to do will be to let Alberta revert to an agricultural economy and let all the people that moved here go back to the big population centres clustered by the US border.

[Nick Rowe]

Joseph: short answer. A truckload of Loonies is shipped across the bridge to foreign owners, but the foreign owners don't want loonies, so those loonies get shipped right back across the bridge, in exchange for Canadian exports of goods, which foreigners do want. (If we had reduced our own consumption in the past, to save more, to finance the past investment ourselves, we wouldn't need to export those goods to foreigners today, and could consume those goods ourselves today. Standard trade-off between current consumption and future consumption.)

It's a real shame the Loonies don't get shipped one-way across the bridge and stay there forever. Because it is really easy and cheap for the Bank of Canada to print more Loonies. (The US Fed can actually do this a bit, because foreigners do seem to want to hold a lot of US banknotes. Think of it as a 0% interest loan by foreigners to the US government.)

[Neil]

There's probably some wise policy advice not to double down on your comparative advantages. Resource sector-specific tax advantages (like flow-through shares), which are nothing more than direct subsidies to a booming industry. The story of manufacturing now is the same story any industry in decline will face, needing lower wages and more subsidies to avoid shutting down entirely. And if there's historically large employment in the industry, then there's tremendous political pressure to provide the subsidies.

@Kailer - I'm not sure that's true. Right now, the most profitable thing you can do in Alberta is extract resources, so we do a lot of it. If the world prices of resources fall, our next best option isn't necessarily moving away, not if our existing infrastructure can be put to other uses. You can't force economic diversity, but public policy can push on that lever. It just means removing subsidies to the dominant industry, and creating subsidies for industries that show promise to pick up the slack later. Education funding is also a good investment since educated workers are better able to adapt to changes.

[Neil]

Actually, it looks like we're probably doing a better job of pushing on the diversity lever than it feels like. Consider Alberta GDP by industry between the current boom and the '80s boom. In 1985, energy was 36% of the economy. In 2013, it's less than 25% of a much larger economy.

[Neil]

Sorry, intended to include a link:
http://www.albertacanada.com/business/overview/economic-results.aspx

[Ron Waller]

Betting the economy on resources is a terrible idea. It's banana republic economics. Resource prices are volatile. Resource booms are followed by resource busts. They provide low-skilled jobs out in the middle of nowhere. And it's not as if all provinces can start digging holes in the ground.

In order to keep up with the developed world we need to be involved in the high end of the production chain, not the bottom end. The future is in innovation and productivity growth. We must invest in post-secondary education and worker training to create high-skilled jobs. This is the only way to halt the hollowing out of the middle class due to income polarization caused by globalization.

[Nick Rowe]

The weird thing is, this isn't even, or shouldn't be, a left-right issue.

Just suppose I were a communist central planner, and I had to decide what goods Canada should produce. I would find Ron's arguments totally unpersuasive. In fact, I would find them persuading me to lean towards doing the exact opposite.

If every other country believes in Ron's arguments, they would tend to be prejudiced against wheat farming, which would reduce the world supply of wheat, which would raise the price of wheat, which would make wheat farming more profitable. And would be prejudiced in favour of manufacturing, which would increase the supply of manufactured goods, and reduce their price, which would make manufacturing less profitable. So wheat farming would be more profitable than manufacturing, simple because of that prejudice against wheat farming and in favour of manufacturing. So if I didn't know whether Canada had a comparative advantage in wheat farming or manufacturing, I would choose wheat farming for Canada.

Sometimes it helps to abstract. Suppose there are two goods, A and B. And one unit of labour can produce a units of A or b units of B. If a is constant over time, and b is growing at 10% per year because of technology, then the price of B will be falling at 10% per year relative to the price of A. So the fact that technology is improving in B, and not in A, gives me no reason to produce b rather than A. This is Adam Smith (or Karl Marx, for that matter.)

[I was going to say "Why don't non-economists get this?". But then I remembered that little experiment where a bunch of PhD economics students didn't get it either, even though they could solve the math for a dynamic two sector growth model with technology improving in one sector but not in another. Talking about haircuts still confused them.]

[Nick Rowe]

Suppose farmers can grow either wheat of barley. Suppose that growing wheat is riskier than growing barley. Some farmers would then grow barley instead of wheat, to avoid that risk. But this increases the supply of barley, and reduces the supply of wheat, which reduces the price of barley, and increases the price of wheat. And this persuades some farmers to grow wheat despite the higher risk.

If I am wealthier than most farmers, and better able to survive risk, the fact that wheat is riskier than barley is an argument in favour of me growing wheat.

[Bob Smith]

To Ron's point why do we assume that manufacturing jobs are high skilled jobs while resource extraction (or agricultural) jobs are low skill? Indeed, isn't one of the claims made by proponents of supporting the manufacturing industry that they provide relatively high wage jobs for low skilled workers? Certainly, it isn't immediately self-evident that someone working in a plastics factory is doing higher skilled work than someone working in the oil sands.

It's true that not all provinces can dig holes in the ground (although given Canada's resource abundance there's no shortages of unexploited opportunities in many provinces), but so what? If there are no resources to exploit, you have to do something else. If there are resources to exploit, why have a bias towards manufacturing in government policy?

Sure, the resource sector faces volatility, but the manufacturing sector in some ways faces worse challenges, namely a long-term secular decline in employment and share of GDP (as productivity enables us to produce more "stuff" with fewer inputs and more cheaply- just as happened in agriculture and resource industries a century ago).

Proponents of the Staples theory are no doubt haunted by the mining ghost towns that dot rural Canada. Well, are they so different from the manufacturing ghost towns of the US rust belt (Detroit, Buffalo, Cleveland, Pittsburg - each of whom has experienced significant population drops (i.e., ~40% or more) in the 25 years after 1970)?

Ultimately, the distinct between "resource" industries and "manufacturing" industries is an artificial one - they all "manufacture" something, whether it's crude oil, wheat or widgets.

[Stephen Gordon]

I guess I should direct people to this thing I wrote about 'Dutch Disease'. It turns out that the reason manufacturing sector employment has declined is that the wages there are lower than what is on offer in other sectors.

[Victor Short]

I think the economists in the room are missing the essential difference between natural resources and manufactured goods. Specifically, that resources are an already existing gift from god, nature, etc., and manufactured goods are the products made by people with the help of capital improvements. Staples Theory is only relevant because it recognizes this basic difference between resources and goods, how this effects relations between sectors, and then tries to develop principles and policy from there.

Consider the differences between the two sectors from a financial & accounting perspective. Manufacturing is a labour employing going concern all the way down; it has to be in order to stay in business. But in the case of natural resources, there is a share of income derived from owning the resource itself above and beyond (or perhaps more accurately below) any human labour and capital improvement. And for this reason, there is also a futures market for un-commodified resources. Even if a resources market bottoms out and there is dis-investment in the going concerns of that sector, the futures market for the resources on their own remains. Think about it in terms of the Ricardian / Georgist argument about the distribution dynamics of land rents but applied to non-human produced resources writ large. There is an automatic privilege in owning something that does not depend on the continuous input of human labour to maintain its value.

[Bob Smith]

"Specifically, that resources are an already existing gift from god, nature, etc., and manufactured goods are the products made by people with the help of capital improvements:

I'm not sure that distinction is as meaningful as you suggest. Yes, there may be a big puddle of oil under Alberta or big hunks of diamond under the NWT, but that oil or those diamonds aren't worth much to anyone until you apply labour and capital to remove it from the ground. In effect mining is the process of manufacturing usable resources from unusuable ones. That owners of unusable resources derive income from owning those resources doesn't distinguish the natural resource industry from other industries - the same logic applies to any industry that has a location specific input (i.e., a supplier of coal located in proximity to a particular manufacturer may be able to charge a premium price to reflect lower transportation costs, a supplier of land on prime manufacturing space (say with proximity to sources of cheap transpotion, such as ports or rail lines), can charge a higher premium, etc. The same analysis would have been true of the manufacturing sector in Buffalo in the 1890s and 1900 (back when Buffalo was one of the richest cities in America) relying on cheap hydrological power from the Niagara river, when manufacturers would have had to pay a premium for real estate which access to the Niagara River.

[Majromax]

@Stephen Gordon:

> I guess I should direct people to this thing I wrote about 'Dutch Disease'.

I think that's the wrong link. It goes to your Maclean's article on surpluses versus program spending as a share of GDP.

> It turns out that the reason manufacturing sector employment has declined is that the wages there are lower than what is on offer in other sectors.

Isn't that reasoning from a price change? I can't see your fuller argument, but it seems equally plausible that the wages are lower because of the secular economic trends resulting in a lower quantity of manufacturing labour demanded.

[Victor Short]

Bob, I respectfully disagree. First, the distinction between resources and goods matters as a distribution issue insofar as some people can indeed afford to wait, i.e., convert these resources that are not in demand into capital via the futures market, whereas other people cannot afford to do so and are depend on current production of goods and income. The owner of a resource deposit can and does distinguish between this and a capital going concern simply because it is a scarce non-depreciating asset that doesn't depend on employing services to maintain its value as a scarce asset, which will eventually be in demand. On the other hand, disinvestment in the manufacturing sector often leaves nothing much left over but an empty building to be demolished. Its not a matter of geographic location, but of the real differences between the gift of land & resources and human produced goods & capital.

[Patrick]

Why attach a moral value to one part of the supply chain over another. What's the difference if you're babysitting the robot that digs the aluminium or iron out of the ground vs babysitting the robot that drills out the cylinder bore in the engine block? If it turns out that the best margins/wages are at the front-end of the supply chain (and in many cases, it seems to be the case), why not take advantage?

And as Bob pointed-out. Resource extraction itself requires the manufacturing of lots of stuff, much of it very sophisticated. I earn my wages creating software used, among other places, in O&G and mining. On the surface, you might say that my job is the sort of high tech, value-added jobs we want. Dig a little deeper and you find it probably wouldn't exist if not for resource extraction. Sure, I could write trite 'apps' for phones, but my wages would be less and I'd want to top myself to relieve the sense of futility and boredom ;). It's way more fun to work with all the huge machines in oil sands and the diamond mines.

[Ron Waller]

"Just suppose I were a communist central planner, and I had to decide what goods Canada should produce. I would find Ron's arguments totally unpersuasive. In fact, I would find them persuading me to lean towards doing the exact opposite.

"If every other country believes in Ron's arguments, they would tend to be prejudiced against wheat farming, which would reduce the world supply of wheat, which would raise the price of wheat, which would make wheat farming more profitable."

Done playing with your legos? (No wonder neoclassical economic models are so bad at describing reality.)

Developed countries have much higher productivity and living standards than undeveloped ones because their governments invest in social capital and physical infrastructure. The government's job is not to direct the economy (towards resource extraction or manufacturing) but to provide the underlying conditions that maximize opportunities for workers and businesses.

Since globalization means low-skilled jobs are being outsourced, that means government must invest more in people to increase their skill-sets. A grade 12 education was fine back in the 1950s. It is useless in the modern globalized economy. So our education and worker-training system must be upgraded to meet the needs of the times.

BTW, a tale of two undeveloped countries: South Korea and Chile. When General Pinochet ushered in Chile's free-market revolution in 1973, Chile had a higher GDP-per-capita than South Korea. But did South Korea let the free market place work its wonders? Actually no. They had a command economy that turned the country into an electronics super-power.

Today South Korea has a GDP-per-capita of $34k which is the same as Italy's, a G7 country. Chile's is $23k. South Korea also has lower inequality than Canada and the fastest internet on the planet. Chile has one of the highest levels of inequality in the world (ranking #131 of 153 countries.)

If South Korea had listened to idiots like Ricardo, they would be exporting rice instead of smart phones and smart TVs.

[Ron Waller]

"If there are resources to exploit, why have a bias towards manufacturing in government policy?"

It's not a debate between resources and manufacturing. In a modern globalized economy, nothing is manufactured in a single country. Various components are designed and manufactured in many countries. Even components of software design are outsourced (like unit testing.)

The role of the democratic government is to maximize opportunities for workers and businesses to ensure we keep pace with the developed world. The most wealth creation comes from the high end of the production chain. We need to be involved in the creation of high valued-added goods and services.

Most Canadians do not want to be hewers of wood and scrapers of tar. We want to be on the cutting edge of research, development, innovation and technology. These areas provide rewarding careers as well as great business and investment opportunities. We should emulate Germany and South Korea, not Russia and Chile.

[Ron Waller]

"Why attach a moral value to one part of the supply chain over another. What's the difference if you're babysitting the robot that digs the aluminium or iron out of the ground vs babysitting the robot that drills out the cylinder bore in the engine block?"

It's not the government's job to pick and choose. Its role is to invest in human capital and physical infrastructure.

The big difference between resources and value-added goods and services, is that the market will always pay a premium for the latter, but not the former. The market value of commodities is volatile. So a country foolish enough to think its resources give it a comparative advantage (typically undeveloped countries) will pay the price when commodity prices fall.

Unfortunately, both Harper and Trudeau Jr. believe the future of the Canadian economy is exporting resources to China. This government interference is not picking winners. It is picking bottom feeders sure to wreak economic havoc when the resource boom turns to a bust.

In order to keep up with the developed world, we must be a part of a 21st-century economy. How it develops, no one knows. But it will require skilled workers and entrepreneurs. Resource corporations don't need the government's help.

[Determinant]

I always thought economic diversification was the best strategy. Problems usually start when one sector dominates an economy.

[Bob Smith]

Ron,

You're all over the map here. On the one hand you say "It's not the government's job to pick and choose. Its role is to invest in human capital and physical infrastructure". Fine, I don't think Stephen or I disagree with that in the slightest - that's the point we're making. But then you say we should follow Korea's alleged example of adopting a command and control economy while not letting the free-market decide what industries we invest in. Let's just acknowledge that the two positions you've taken are contradictory. Pick one.

You go on to say "Most Canadians do not want to be hewers of wood and scrapers of tar. We want to be on the cutting edge of research, development, innovation and technology". Ok, I agree that most Canadians want to be at the cutting edge of research, development, technology, etc. But that's only a case against resource industries if the no technological progress is possible in those industries. But that's a claim that's facially laughable. Indeed, the experience of the oil and gas industry in North America illustrates the fallacy clearly - the Alberta oil sands (or tar sands, as you prefer) and US fracking is a testament to the technological progress in those industries, which have allowed producers to exploit ever more marginal reserves. The characterization of workers in those industries as "scrapers of tar" (i.e., menial manual labourers) reflects a profound ignorance of an industry which relies extensively on highly skilled workers (while also providing employment to less skilled workers).

Finally, you continue the counter-factual fetish for manufacturing by insisting, against all evidence, the markets will pay a premium for manufactured goods. If that were true, Stephen's research wouldn't show that the resource sector pays higher wages than the manufacturing sector (unless you believe the resource companies like giving away money). True, resource prices can be volatile (though producers and governments alike can and do hedge the risk associated with such volatily - Norway's stockpiling of oil revenues is a model example if what developed resource extracting jurisdictions should do, Alberta's squandering of its oil wealth, not so much). On the other hand, as Stephen"s graph makes clear manufacturing prices exhibit some significant medium term volatility of their own and manufacturing prices are in a long term secular decline.

I agree with your starting point that governments should be neutral as between different industries. So let's end the fetishization of manufacturing.

[ianlee]

Stephen - once again an excellent "deconstructive" post with fascinating responses (especially Bob Smith who should be publishing some Op-Eds).

Suggestion: could you or Nick analyze and initiate a debate on Summers' latest paper, "Asiaphoria and regression to the mean" http://www.nber.org/papers/w20573

"Consensus forecasts for the global economy over the medium and long term predict the world's economic gravity will substantially shift towards Asia and especially towards the Asian Giants, China and India. While such forecasts may pan out, there are substantial reasons that China and India may grow much less rapidly than is currently anticipated. Most importantly, history teaches that abnormally rapid growth is rarely persistent, even though economic forecasts invariably extrapolate recent growth. Indeed, regression to the mean is the empirically most salient feature of economic growth. It is far more robust in the data than, say, the much-discussed middle-income trap".

[Majromax]

@Victor Short:

> But in the case of natural resources, there is a share of income derived from owning the resource itself above and beyond (or perhaps more accurately below) any human labour and capital improvement. And for this reason, there is also a futures market for un-commodified resources.

That's an argument on a false premise. There's a very vibrant futures market in the agricultural sector, but disinvestment there leaves empty pastures and barren fields just as much as rusted-out manufacturing buildings.

We also have a futures market in gasoline, which is a manufactured derivative of oil.

> On the other hand, disinvestment in the manufacturing sector often leaves nothing much left over but an empty building to be demolished.

That's a hollow distinction, because an abandoned and collapsed mine is just as difficult to re-open as an empty shell of a factory.

You're right in that resource extraction is ultimately based on a scarce natural resource, but that's fine. All that means is that the rightsholder's calculus should remember that extraction is ultimately conversion of one particular, highly-illiquid asset (stuff-in-the-ground) to a more liquid asset (stuff-in-a-truck).

Where public policy enters into things is that it's too easy to forget that and sell extraction rights too cheaply, but that's just a value-for-money argument.

[Victor Short]

Major,

Disinvestment in agriculture does not leave barren fields, it leaves fallow lands. As the Physiocrats said, nature is a different and distinct factor of production from human labour and capital in that it reproduces itself. The futures market began in agriculture because the permanence of arable land made it a reasonable guarantee that there would be a future yield. As with all staples commodities, their existence is a known fact regardless of the relations between work and capital required to extract them.

Again, I'm saying this matters from a distribution point of view. Or maybe more accurately, a factor proportionality point of view. Scarce imperishable assets tend to attract investment for reasons independent to the labour needed to eventually extract them, but simply as a speculative position that the these unused resources will rise in value over time. What matters is the very fact that this stuff in the ground (and the land itself) exists in of itself as a valuable thing without the continuous input of labour and capital services.

[Ron Waller]

"You're all over the map here. On the one hand you say 'It's not the government's job to pick and choose. Its role is to invest in human capital and physical infrastructure'. Fine, I don't think Stephen or I disagree with that in the slightest - that's the point we're making. But then you say we should follow Korea's alleged example of adopting a command and control economy while not letting the free-market decide what industries we invest in. Let's just acknowledge that the two positions you've taken are contradictory. Pick one."

Learn how to read. I never said we should adopt South Korea's command economy. Just used it as an example to show how free-market and comparative-advantage ideology is nonsense.

"The characterization of workers in those industries as 'scrapers of tar' (i.e., menial manual labourers) [blah, blah, blah]"

The "hewers of wood and drawers of water" metaphor means having a pre-20th-century resource-based economy. No doubt there are many skilled tar-scrapers wasting their lives helping to destroy civilization. Canadians should have the choice to do that if they want. They should also have the option to work in other sectors of the economy, contributing to the betterment of humanity.

"On the other hand, as Stephen"s graph makes clear manufacturing prices exhibit some significant medium term volatility of their own and manufacturing prices are in a long term secular decline. So let's end the fetishization of manufacturing."

As I have already stated, those who think there's a dichotomy between resources and manufacturing are ignorant of how the global economy works. There are goods and services that have virtually no resource or manufacturing component. Take for example a video game that is sold on Steam. Obviously its foolish to consider that "manufacturing."

[Lorenzo from Oz]

It is fascinating reading Canadians having much the same arguments as Australians do. Hardly surprising--both well-endowed in land, relatively lightly populated, capital-importing countries with good institutions which do quite well, thank you.

If you are densely populated South Korea or Germany with strong education ethics, manufacturing makes perfect sense as a focus.

Australia spent decades having per capita economic growth rates notably lower than the developed country average trying to prop up manufacturing in a lightly populated, capital-importing country, well-endowed with land. When we gave that up (mostly), our per capita economic growth rates shot up. We are the resources-and-services economy you would expect, though with some useful niche manufacturing. And doing quite nicely, thanks.

Comparative advantage wins in the end, though it is useful to keep in mind that it can (within certain constraints) be created, given that capital is the produced means of production and institutions profoundly affect economic outcomes. But you just can't make a capital-importing, lightly populated, lots of land country into a manufacturing-centred economy and keep up with the economic Joneses. Doesn't work. We know, we tried. For decades, we tried.

[Bob Smith]

Ron: "Learn how to read. I never said we should adopt South Korea's command economy. Just used it as an example to show how free-market and comparative-advantage ideology is nonsense"

Perhaps you should read what you actually wrote: "We should emulate... South Korea".

"Canadians should have the choice to do that if they want. They should also have the option to work in other sectors of the economy, contributing to the betterment of humanity."

Well aside from the silly implication that working in the resource sector doesn't contribute to humanity, no one disagrees with that proposition. Of course, in fact Canadian DO have that choice and over the past decade have been increasingly exercising it by choosing to work in the oil and gas industry. People like you and Andrew Jackson seem to think that's a bad thing.

[Ron Waller]

"Perhaps you should read what you actually wrote: 'We should emulate... South Korea'."

Yes, I wrote we should look to Germany and South Korea as examples, not Russia and Chile (economies involved in the high end of the global value chain as opposed to the bottom.)

In the context of my original statement — it's not the government's role to pick winners but to invest in human capital and physical infrastructure — there's much we could learn from South Korea and Germany.

South Korea invests heavily in broadband internet (wired and wireless). This is the equivalent of government building railways in the 19th century, and highways in the 20th.

Germany has a good education system for producing skilled workers.

In short, build the human capital and physical infrastructure and the value-added industry will come (and emerge.)

"Of course, in fact Canadian DO have that choice and over the past decade have been increasingly exercising it by choosing to work in the oil and gas industry. People like you and Andrew Jackson seem to think that's a bad thing."

Many resources jobs are out in the middle of nowhere and make for miserable working conditions. I know people who have worked in the bitumen sands. They become migrant workers, leaving their families behind, sending home their paychecks. The pay is good. The work is not. People would rather have good job opportunities closer to home (or at least closer to civilization.)

[Ron Waller]

"If you are densely populated South Korea or Germany with strong education ethics, manufacturing makes perfect sense as a focus."

This is a good example of how Ricardo's early 19th-century concept of comparative advantage is nothing more than racist nonsense.

The idea that Canadians and Australians are too dumb to be involved in the creation of value-added goods and services is absurd.

I'm not familiar with Australian companies, but there have been many leading-edge Canadian companies. Corel is a software company that has been a pioneer in graphics design software from the start (first release: 1989 on Windows 2.1.) ATI produced the world's fastest video cards (competing with Nvidia.) It was eventually acquired by AMD. Blackberry Ltd was a pioneer in smartphones.

Canada had no comparative advantage to produce these companies other than being a developed country with a good education system. But a better post-secondary education and worker-training system will create more businesses that produce value-added goods and services that are sold on the global market.

The entire resources/manufacturing dichotomy is dated. Time to get with the 21st century.

[Lorenzo from Oz]

Ron Waller: not what I wrote. (And how can praising Koreans and Germans be "racist" against such multi-ethnic societies as Australia and Canada?) There is more to "value adding" than manufacturing. You may have noticed I mentioned services: actually, apparently you didn't.

Australia and Canada are both very prosperous societies. Indeed, on a per capita GDP (PPP) basis, Australia is more prosperous than Germany, Germany and Canada are comparable, while both Australia and Canada are more prosperous than Japan and significantly more prosperous than South Korea. Given that very few countries are more prosperous than both Australia and Canada--and those that are either small, oil-rich, both or the US--really, we seem to be doing fine doing as we are doing.
http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)_per_capita

Indeed, in human development index (HDI) terms, the comparison is even more in our favour:
http://en.wikipedia.org/wiki/List_of_countries_by_Human_Development_Index

[Bob Smith]

"The pay is good. The work is not. People would rather have good job opportunities closer to home (or at least closer to civilization.)"

I hope you appreciate the irony that 150 years ago the same crtique was levied against the manufacturing sector. Good thing it was ignored.

[Nick Rowe]

Does anybody know if wheat farming produces more value added per worker than manufacturing? My guess is that it does, because of the land.

[Bob Smith]

"In the context of my original statement — it's not the government's role to pick winners but to invest in human capital and physical infrastructure — there's much we could learn from South Korea and Germany."

If your only point is that governments should invest in infrastructure and human capital, no one disagrees with that proposition. Of course, that doesn't inherently have anything to do with the structure of the economy between resources, manufacturing and services, since all three sectors rely, in different ways on skilled labour and infrastructure (not for nothing, the biggest infrastructure projects currently being discussed in Canada are various pipelines intended to expedite the exploitation of Canada's oil wealth (i.e., Northern Gateway, Keystone, etc.).

Mind you, if that's what your advocating, your suggestion of emulating Germany seems misplaced. While Canada and Korea spend a relatively high portion of their GDP on education(6.9% and 7.5%, respectively) Germany is a relatively low spender, at 5% of GDP (just to illustrate the fact-free basis of your criticisms, Chile, which you distain, is one of the OECD countries which commits the greatest proportions of its GDP to education at 7%).

And, of course, in terms of post-secondary education spending, Canada is the world leader (measured in terms of spending as a percentage of GDP), followed in rank order by the US, South Korea and Chile. Germany's post-secondary education spending is below the OECD average and less than half of Canada's. So remind me again, why we should emulate Germany?

[Bob Smith]

"The idea that Canadians and Australians are too dumb to be involved in the creation of value-added goods and services is absurd."

No one is saying that. Clearly we're smart enough to program award winning video games (i.e., recent installments of the Assasins Creed and Batman series), as well as to extract previously inaccessible crude oil from the oil sands or diamonds from the permafrost of the NWT. The point is that no one sector has a monopoly on brilliance, and there's nothing that makes the creation of an extra dollar in wealth in the tech special more important than creating an extra dollar of wealth in the resource sector. A dollar's a dollar.

[Jacques René Giguère]

Low end Chile? Whatever my family would say, Chile is indeed a brutal society. But their wine is geting better all the time and money is money. They are progressing industrially, not as fast as they should (they are South American after all) but it's not as bad as it was.