Economic development: All about the money, honey?

This is a recurring theme on this blog but I feel it is timely to raise it again.  Specifically I am talking about the role of government in support of economic development.

I’ve seen multiple people on LinkedIn peddling new federal government programs to promote cleantech development, help companies export, etc.  They are all under the umbrella of the Atlantic Growth Strategy.

Is the Atlantic Growth Strategy a growth strategy or is it a relatively small pile of cash doled out to firms by earnest bureaucrats?

This is a fundamental strategic issue for Atlantic Canada.  If the government’s goal is getting the regional economy back to a sustained level of growth, that may or may not entail more direct cash handouts to firms.  A true regional growth strategy would identify the causes of economic stagnation – low levels of inward migration, increased global competition, lack of new, high growth potential entrepreneurs, lack of multinational investment, etc. and then put some serious thought to what role can (or should) government play to influence positive economic growth?

It all seems to boil down to the cash.  It’s easier that way.  For government it is easy to set up a $20 million fund, build program rules around its distribution, dole out the cash and monitor the results.   It is hard – sometimes really hard – to positively impact economic growth.

As I have said before, I am not opposed to direct cash transfers – where there is a demonstrated competitive need and a strong ROI but if governments are looking at how they can influence economic growth in a positive way the thinking has to go way beyond cash to firms.  Best case scenario the cash has a slightly positive impact. Worst case it is just tax dollars crowding out private sector dollars – as many firms have told me government cash can be had at much better terms compared to banks or investors – so why not take the government cash?

Think about New Brunswick.  The economy is roughly $30 billion (real GDP).  If you want to see a 3% growth rate you will need the real GDP to grow by $900 million per year.  You won’t get this done by making a few zero interest loans to cleantech firms or giving up to $15,000 for a small business to start exporting.

ACOA has approximately 600 staff in Atlantic Canada.  The various provincial agencies (ONB, NSBI, etc.) have roughly 500 staff (conservative estimate) – roll up all local economic development agencies, CBDCs, allied organizations such as NRC, NBIF, Innovacorp, etc. and you get easily another 300-400 staff.  So we have roughly 1,400 – 1,500 people in Atlantic Canada paid by government to do economic development (somewhere around $100 million just in payroll and benefits).    There is about one economic development person for every 50 firms around Atl. Canada.   There is one economic development person for every 1.5 exporting firms (international exports).

With all this horsepower we should be able to move a little bit beyond doling out cash.

 

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Looking for Bootstraps: The Musical

In my view, Donald Savoie’s Looking for Bootstraps should be required reading in the Maritimes.  As a follow up to Visiting Grandchildren, he has added new content and important new thoughts on the issue of economic development in the three Maritime Provinces.

One of the challenges, however; is the format.  Although Savoie deliberately writes for a broader audience, it’s certainly not written for the average Grade 8 student.

My 16 year old daughter is taken by the musical Hamilton.  She knows it backwards and forwards.  She has the music, a book about it and has done a ton of research.  In fact, she knows about as much about Alexander Hamilton’s life as the average U.S. presidential historian – how he lived, his role in the revolution, how many federalist papers he wrote and what he focused on, his feud with Burr (and untimely death by duel), etc.   She was rattling off these facts one day recently and I asked her how much she knew about Sir John A. or Wilfrid Laurier or the Fathers of Confederation?

Not much, she said, but if they would write a musical, she would nail it.  And then she went on to lecture me about pedagogy and how the current approach to teaching is mis-aligned with how students best learn circa 2017.

Fair enough.

But my thoughts turned back to the old sage of economic development.

How about “Looking for Bootstraps: The Musical”?

boots2

 

As usual here, I put this forward only partially in jest.  If we found ways to broaden the appeal of the content we could reach broader groups and better explain the history and sources of the region’s economic challenges and get people better motivated about the solutions.

For example, I think Savoie’s book should be given to every high school student in the province and should be discussed and debated in class.  If the best way to get this done would be to distill the content down to infographics and 140 character tweets, then so be it.

bootsmusical

 

The truth is that New Brunswickers – and Maritimers – have been inured to the economic reality here.  Most just believe the standard view that this region is economically depressed and there isn’t much to do about it.  If you can’t find work here  – you go down the road.  After 20+ years of studying this, I can tell you most people are resigned to the fact and not particularly concerned about it.

Savoie’s story would explain how we got here and provide pathways to improve our lot.  But we have to find ways to broaden the base.  All of the usual suspects – like me – have read his book – just like the many others he has written on related subjects.  And we haven’t made much difference.  Maybe we should broaden the base.

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When does something rise to the level of ‘controversial’?

I was surprised to read this CBC article describing the Sisson Mine as ‘controversial’.    I’m not sure it is particularly controversial.  It has gone through a thorough environmental process and received both federal and provincial approvals.  A while ago the CBC sent a journalist out to the Stanley area to ask local residents what they thought and it was mostly positive.

There are mining projects just like this in almost every province.  Manitoba generates $2.8 billion worth of GDP from mining.  Quebec $4.7 billion.  BC $10.7 billion.   New Brunswick?  We’re down to $270 million worth of GDP from mining and that includes quarrying.

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What makes something rise to the level of controversial?   Anne Murray fought against wind turbines in Nova Scotia.  Were they controversial?  Long time residents of San Francisco are fighting the evil Google and its distortion of housing prices and general disruption of SF culture.  Is Google controversial?  A UdeM professor once authored a documentary that was deeply critical of contact centres – are they controversial?

You know where I am going with this.  A lot of people trust the CBC.  They rely on it for their news.  Many New Brunswickers that would likely see the importance of Sisson Mine – most people realize that the products they consume are filled with mined natural resources and understand that Canada is a country with vast mineral resources –  but if the CBC is now saying it is ‘controversial’ they may start to think there is something more risky about this specific mining project  – compared to the hundreds of mines across the country.  And when they read about the one massive mining disaster in BC – and not the hundreds that have been developed with a very limited environmental footprint – they may start to change their minds.

I personally don’t think the Sisson mine is particularly controversial. There are some folks opposed – that is natural in a democracy.  If these projects go through rigorous provincial and federal environmental reviews and pass I’m not sure the media should describe them as controversial.

In reality, New Brunswick could use the economic boost.  We used to get close to a billion dollars worth of GDP from mining (when Bathurst was going full steam, and later when potash was booming) and now it is down to a piddly $268 million.  The 10 provinces combined generate $168 billion worth of provincial GDP from mining and NB gets about two-tenths of one per cent of that GDP.   A little more would be welcome.

mine1

 

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The rise of Glamping. What can we learn from Mongolia about tourism investment?

There is an interesting article in the Economist this week about the rise of ‘glamping’ in China.  This glamorous camping is done by rich Chinese. The yurts have “beds, windows, Wi-Fi and en suite bathrooms.”    And this “A single campsite in Hubei can accommodate 8,000 people. Many offer entertainment too. The Swan Lake tourists enjoy Mongolian banquets and dancing in a giant concrete yurt.”

I have thought for a long time that if New Brunswick – and the Maritimes – want to seriously boost tourism – we have to be far more focused on tourism investment.  As I have written many times before 98% of our effort is on how we get more tourists here and not on how we attract really nifty new tourism investments that will attract tourists here.

This may be an accident of history in New Brunswick but we have never really put any focus on trying to attract tourism investment or entrepreneurship.  There have been a few less than successful efforts like putting government money into “cottage clusters” in the 1990s.  But that is not what I am talking about.  In fact, I’m not talking about government incentives at all.

I’m talking about a deliberate process of identifying potential new tourism investments that might work at the local level all around the region and then promoting those potential opportunities to tourism entrepreneurs.   If you don’t like the idea of ‘government’ doing that work, fine – give industry the mandate – or consultants – or, I don’t know go ask the Mongolians – it seems to be working for the yurts.

Instead of putting all the focus on trying to boost tourist numbers we should put a focus on boosting tourism investors.  Then we’ll have the product that will boost the tourism numbers.

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Foxconn, incentives and ROI: Redux

I recently wrote about the big Foxconn expansion in Wisconsin and the $3 billion incentive package.  I wondered about the ROI on that level of incentives.  It wasn’t clear to me if the project would achieve any real ROI over time – based on the economic impact numbers published by the Wisconsin government.

Then I read this.  It’s an interview on the project from what appears to be a respectable economic development consulting firm.  Here’s the point that bugs me.  It’s made by a consultant: “Three billion of anything is a lot. But again, as with everything when you dig deeper and look at the economic upside of jobs and investment you can see why Wisconsin or quite frankly any state would come to the table so aggressively. You know, I guess one of the things I try and do is remove all the zeros and think about it in simple terms and you know this is simplifying it perhaps too much but Wisconsin is getting $10 and their giving back $3.”

Nope.  That is not correct.    The only ROI measure that works for government investment into economic development is incremental tax dollars.   Comparing the $10 billion investment to the $3 billion in tax incentives is like a company comparing revenues and profits – they are related but separate concepts.

This Reuters article makes the point.  Based on the scenario outlined, the article says the state might not break even on the $3 billion for 25 years in terms of incremental state taxes.

Economic developers cannot miss this fundamental point.  The only ROI that matters is “for every tax dollar we pay out, how many incremental tax dollars will be generated?”.

The public purpose of economic development is not jobs or investment or new plants.  It is to drive economic activity to ensure there is enough tax revenue to pay for good quality public services and public infrastructure.  That’s it.  If a government dips into the tax coffers and spend $1 million to attract a firm and the tax revenue from that firm over 10 years is $5 million – that means for every $1 in you get $5 out- that is an ROI.

Although, as an aside, there are other public ‘costs’ to having that company in your state.  It will have trucks beating up the roads, it’s employees will have kids in schools and they may use public health care – you get the point.  In the example above, the calculus is really: $1 million worth of incentives + $2 million worth of public ‘cost’ over the ten years – to generate $5 million in incremental taxes for a real ROI of 0.66 – for every dollar we put in, we generated an incremental $0.66 in tax revenue above the cost of the incentives and the public costs associated directly with the project.

I’m all for attracting big plants.  I think it will help put Wisconsin on the map and may yield benefits not yet quantified.  But if we move to a world where we don’t care about taxes-based ROI – I think we are heading into dangerous territory.  I remember when the big auto manufacturing plants were getting $200 million and $300 million back in the 1990s there was outrage- but there was a clearly definable tax-based ROI over 10-15 years. Auto has a huge supply chain which helps.

And as for economic development experts and consultants, they are not doing the public any favors by spreading this nonsense about “Wisconsin is getting $10 and their giving back $3.”

This is very bad grammar, it is even worse economics.

 

 

 

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The monthly labour force survey: Putting little Jonny to work

The journalist Jacques Poitras likes to do his little “Where is this place” on Twitter.  Because originality is challenging these days, I’ll borrow his game with a twist.  I’ll ask – when is this?  To be specific what was happening in May 2003 that would make this chart so significant?

month

Did you guess it?  Without Googling?  When the May 2003 labour force survey data was published it was right in the middle of the 2003 New Brunswick election campaign.   Why I remember this so vividly was the strange response Premier Lord made at the time.  When he heard the employed labour force dropped by 8,000 in one month – his response was “I don’t believe it”.  Now considering Statistics Canada is one of the most respected national statistics agencies in the world, I would have thought he would have went with the usual boilerplate about typical monthly fluctuations, the longer term trend looks better, etc.  but he chose to go with “I don’t believe it”.  Anyway, he ended up taking a bit of a beating in 2003 and nearly losing what they had thought would be a sure thing election.  I’m not sure the LFS swayed a lot of votes but it certainly was bad timing.

Take another look at the chart above.  What happened the very next month? Almost a complete course correction.  Now take a look at the labour force trend in New Brunswick in recent months (remember the labour force is the sum of those working and looking for work).   In just the last couple of years I see at least three big month-to-month swings in the size of the labour market – down big one month and up big the next.  This is the nature of the LFS.  It is equally possible when the September LFS is published the NB labour market could have increased by 4,000 or 5,000 – or not.  The point is that month to month trends are not reliable.   month1

 

 

I have to admit it was kind of cute to see the government publish “lowest unemployment rate since 1976!” with a NB map graphic – and then the opposition published “biggest labour force decline since 1976!” minutes later.

Rather than snazzy infographics – both the government and the opposition should have used the data as a teaching moment.  New Brunswickers need to understand that the long term trend for the labour force is that it is in decline.  You have to go all the way back to January 2001 – the month before my youngest was born (now she is VP student council at Moncton High in Grade 11) to find the last time the labour market was smaller in July than it was last month.month3

 

A shrinking labour market is a drag on economic growth.  Couple this with rising public service cost pressures (i.e. health care) and you have a long term challenge.  We fix the challenge by deliberately growing the workforce with people who want to work the jobs on offer.

This is the biggest issue that no one really wants to talk about.  I hear on a weekly basis someone saying that “little Jonny had to move to Alberta because there were no jobs here – why do we need immigrants?”  The truth is there are lots of jobs if little Jonny wants to move around within New Brunswick and is prepared to take the jobs on offer.  In January, Statistics Canada reported in its Job Vacancy survey there were 5,700 jobs available in that month alone.  There were 1,800 jobs in sales and service occupations, nearly 800 in manufacturing jobs and 650 in trades related jobs and 600 in business and finance jobs.   But the average wage on offer wasn’t particularly high for many of the jobs as shown in the following chart.  If you can’t do the math on these jobs I will do it for you.  On an annualized basis these jobs pay between around $23,000 and $34,000 per year.

monthly4

But if we can’t fill these jobs, the economy will not grow and create the higher paying jobs that Jonny, who graduated with a liberal arts degree, wants and his mother thinks he deserves.

So we either a) find pockets of potential workers in New Brunswick and find a way to get them to take the jobs, or b) we allow the labour market to tighten even more and force up wage rates (by the way wages in New Brunswick on average have been growing much faster than the country as a whole for the past 3-4 years) or c) we find a new source of workers that want to work the jobs on offer.

Option A is not working too well and that is why the labour market hasn’t grown in 15 years (July to July).  There are a whole bunch of reasons why people don’t attach to the labour market – from the 38,000 who collect EI each year to students for whom a job would be nice but not worth moving for or taking a job beneath them.  In addition there is the issue of skills mismatch.  A recently retired logger probably isn’t going to work in a contact centre.

Option B is kind of what we are doing already and how’s that working out?  Annual real GDP growth since 2008 of well below 1 percent going back to 2008.  Companies that can shift work out of New Brunswick are doing it (truckers, manufacturing line workers, etc.) and many that can’t or won’t just aren’t expanding here.  Don’t get me wrong I think there is some potential to boost wage rates through productivity but at the point it triggers dis-investment – it is not worth it.

So that leaves Option C – the option used by Manitoba (fastest growing GDP since 2009) and essentially all provinces that are growing.  Go find the workers – from far and wide – that you need in your economy to foster growth.

This is the teachable moment.

 

 

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To diversify or not to diversify – the economy – that is the question

Jock Finlayson, from the Business Council of British Columbia, recently wrote a commentary where he suggested Canada’s export mix was not sufficiently diverse and too tied to the American market in the Trump era. He states that “Most other advanced economies – the U.S., Britain, Germany, France, the Netherlands, even Italy – exhibit greater product diversity in their export mix.”

There is some truth to his argument but there are also some nuances. First, you have to dance with the girl you took to the prom. Canada has large oil, gas, mineral deposits, large land area for agriculture, forestry and one of the largest coastlines in the world for fish harvesting. Because you are good in these areas isn’t a bad thing. Second, there are a few national industries not tied to these core natural advantages that are key exporters – auto manufacturing, aerospace manufacturing, film/media production, some pharma, and some financial services, less ICT but still important). The challenge here, and the little secret no one wants to talk about, is that it took (takes) huge subsidies and protections to see these industries emerge over many decades. As an aside, of course, New Brunswick generates virtually no economic value from any of these ‘national’ export industries.

So, what to do? If you rely too heavily on your core natural industries – you will get spanked by economists. If you – through huge subsidies, side-deals, protectionism – incubate a bunch of IP-based industries like auto/aero/film/finance – you are accused of picking winners/losers and distorting market forces. If you revert to the old tripe that a country should just open borders, cut taxes and red tape and sit back and wait for investment to roll in – where has that worked?

New Brunswick and national champion industries
Just to pick up on my previous point about NB and how it has fared in the national champion ‘business’ – take a look at the following table. It shows New Brunswick’s share of Canada’s international exports from the top 10 non-natural resources based sectors (i.e. agriculture, forest products, minerals, oil & gas, fish – I left plastic resins in there). Essentially, New Brunswick generates a trivial amount of international exports in these areas. We generate some exports in engineering services but relative to the national total still less than half our per capita amount. Same with tourism – the proxy here is accommodation services. And of course we generate virtually no export revenue in auto, aero, pharma. By the way, both Nova Scotia and PEI put up pretty good export numbers in aero and pharma.

exportsaugust

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The Tantramar Marsh export strategy

 

 

Donald Savoie made another pitch for Maritime Union or at least better Maritime cooperation in a recent Halifax Chronicle Herald commentary.  He focused his message at business leaders suggesting they should do a better job of promoting regional integration.

This has been an idea that is as old as Canada itself.  I’ve been to multiple events where it has been discussed over the past 20+ years and at least the concept of formal Maritime Union never gets beyond the highest level discussion.  I have said elsewhere – and continue to maintain – that if the region’s economy continues to stagnate sometime around 2026 Maritime Union will be more or less forced on the region by the federal government.

The good news is that trade between NB and NS has been going up in recent years (or at least the most recent years I have access to which goes up to 2013).  Nova Scotia is now our second biggest export market by value at $2.4 billion compared to $3.9 billion to Quebec.  If you look at what we are exporting there are a few interesting products and services.  The bulk of exports comes from refined old and forest products but office administrative services (AKA contact centres) export revenue was over $113 million in 2013 and gambling was worth more than $63 million.

While I have been pushing the idea that New Brunswick needs to be focused more on where it fits in the global economy – investment, people and idea flows – that doesn’t mean we should ignore the low hanging fruit in our backyard.  The Economist magazine runs stories its seems on a monthly basis of how trade flows continue to be stubbornly tied to geographic proximity (they are discussing it in the context of Brexit).  New Brunswick should work closely with its partners in NS and PEI – government-to-government and business-to-business.

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Embrace and celebrate your inner snowman

This may not be the best time of year to bring it up but…. New Brunswick has long, cold winters.  There, I said it.  I know that some of you will have your hands over your ears while chanting nah, nah, nah, nah but, no matter, it is true.  New Brunswick has long, cold winters.

I raise this because we spend a lot of time trying to pretend we don’t have winter – to annually erase it from our collective memory.  If you leaf through picture books of the province, you will rarely see a single snowflake.  I recently watched a 8 minute promotional video for a city in Northern Ontario that never once mentioned or showed anything even remotely like winter.  My wife has an old bag of Manitoba flour from 50 years ago (she uses it as a crafty decoration). It’s for Manitoba Hard Wheat – branded as “Island Queen” with palm trees.  I guess the idea is that if you eat this flour you will feel like an Island Queen in Cuba or somewhere.  Let’s be honest.  At the corner of Portage and Main in Winnipeg during January and February doesn’t feel like the tropics – no matter how much wheat you pump down your gullet.

wheat

It’s not just Canadians.  I was given a picture book back in the 1990s  promoting the State of Minnesota.  Yes, you guessed it. Not a single photo of winter or ice.

Now that we have to get serious about attracting people to live here we have to be honest about the weather.  In fact, we should embrace and celebrate it.   It is part of who we are.  It is part of our culture.   There are lots of things to do in winter – skiing, skating, sliding, hiking, snowshoeing, ice fishing, winter camping, bonfires, etc. etc. etc.  Don’t hunker down.  Get out there in the frostiness and grab a newcomer while you are at it.

The next time I pick up an NB picture book, or see a city promotional video, I hope there are images of snowmen, ice fishing shacks and people skiing.  It matters now more than ever.

 

 

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Startups: The Serengeti Plain or a fun summer camp?

It is interesting to see how government and economic development groups have evolved their view on start-up companies over the last 2-3 decades.   Government has always given money to support people who want to start their own business.  I’ll bet their was even more money around 20 years ago to give to folks wanting to become an entrepreneur.  The Transitional Jobs Fund (then Canada Jobs Fund) was giving out money to just about anyone that was unemployed.   As I pointed out then, it didn’t do much to move the needle – the number of self-employed people didn’t go up much and the number of incorporated businesses with employees flat-lined and has been declining.   My point was that it takes more than $10,000 to make an entrepreneur and it takes more than a little government coaxing to make a gritty, bet the farm kind of entrepreneur that wants to build something here and take it to the world.

Nowadays of course start-ups are the hippest thing.  Governments throw millions of dollars at incubators, accelerators, VC funds, Angel funds, start-up camps, university start-up programs – giddy up all with the goal of making it as easy as possible to start, and presumably, grow a business.

I don’t particularly have a problem with this although I hope that governments/economic development groups are not coddling or keeping alive bad business ideas in the name of economic development.  I’ve said it many times before, if governments start treating economic development like social development we are in trouble.  In social development we are specifically trying to raise people out of bad circumstances – bad business plans for their personal lives if you will and we hope to help them succeed even if there are ‘subsidies’ involved.  In strong and dynamic economies bad business plans die and die quickly.

Many entrepreneurs will try 3-4 things before they get it right.  My old boss at a startup I worked for cashed out his RRSPs and then had to beg friends and family just to make the payroll a few times.  He was a true believer – a gritty entrepreneur willing to put up his own risk capital and nearly bought the farm on more than one occasion.  Now he has 30 staff and by all accounts is doing quite well.

We want more entrepreneurs – particularly those with scale up ideas and ambition.  But I am not sure we will get there by setting up shiny new incubation centres or offering summer camps for entrepreneurs.  I think that exposing young people to entrepreneurship as a career path is a good idea but I think we need to give more thought to the ‘who’ and the ‘what’.

Governments and economic development agencies tend to be pretty good at answering the door.  If someone comes to them and says they want to start a business or expand in the province or move here – there are lots of folks to help them out.  But go out and find/recruit the best ambitious entrepreneurs from around the world?  Not so much.  Proactively going out and finding immigrants and enticing them to move here to work in key industries?  Not so much.

Because that is much, much harder.  It’s easy to sit at home and offer financial assistance for businesses that walk through your door.  The other requires much more time and effort and risk.  But in the competitive world we face these days, we must get out of the comfort zone.

In fact, just like entrepreneurs we need to see the economic development landscape more like the Serengeti Plain and less like a bouncy ball pit.

 

 

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