Seeking ‘true’ economic growth

My column in this morning’s TJ looks at the sources of ‘true’ economic growth – specifically incremental economic growth.  I have received several emails already today about this column so let me clarify a few points.

It can be hard to clearly identify what is new economic activity versus what is just shuffling things around or just providing a temporary boost to the GDP.

Something like the call centre sector in the early 1990s was true growth.  In 1989 there was virtually no money flowing into the province from that sector (investment or revenue) and by 1999 it was worth conservatively $200 million per year.  The bulk of that $200 million stayed in New Brunswick and paid for groceries, housing, cars, restaurants and generated millions in tax revenues for government.  All new cash.

The shale gas industry would be ‘true’ growth because it would represent new investment and new revenue streams  and a new supply chain opportunity for NB SMEs.

But beyond these clear examples, it gets harder to identify true growth.  As I point out in the piece, over time population growth is a major driver of GDP growth as the majority of GDP comes from household spending in the province.  But population growth follows core economic growth and not vice versa as we are seeing right now in New Brunswick.

I didn’t cover it in the piece but I have always wondered just how much impact all the government funding programs are having on economic growth in New Brunswick.  I am not sure we spend enough time analyzing this and assessing trends – particularly over a longer time horizon.  According to the New Brunswick Capital Markets Study, governments invested $211 million into NB businesses in 2011 in the form of grants and loans.  Does that investment turn into true and sustained economic growth?  An even more interesting question is how much of that funding could have been secured through other sources?

I have discussed this before but I’ll raise it again.  Back in the mid 2000s I did an analysis of 40-50 firms in a specific NB community that had received funding from at least two government sources over the previous decade (mostly BNB and/or ACOA).   I cross referenced these firms with the directories that government was publishing at the time and found that over half of the firms had not grown – at least in terms of total employment – over the decade (several had gone under).

At the time I recommended that government should track how the companies they provide taxpayer funds to grow over time.   Not just over a few years but over a decade or more.  I’m not sure if they do – if they are they don’t make it public.

I am not criticizing government taking on the role of banker when there are gaps in the market, competitive forces require it and there is a clearly definable return on the taxpayers’ investment but I do think we could and should do more to understand how we are impacting the long term trajectory of the economy.

In the end this comes back to one of my main themes.  We need to figure out what level of economic growth do we want over time and what, if anything, can we do to influence that growth from a public policy perspective.   This isn’t about Soviet style five year plans and direct management of the economy.  The federal government has levels of growth it would like to see and it tailors policies based on economic realities.

We should do the same thing in New Brunswick.  If we need 3 percent real GDP growth over time to sustainably fund public services and infrastructure, we should say so and we should think about the role of public policy to support that.  This view of economic development goes way beyond the ‘bank for business’ model we have in place right now.

 

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3 Responses to Seeking ‘true’ economic growth

  1. mikel says:

    First, if call centres DON”T stay around then what makes them ‘permanent’. Gas, obviously, is only there in set amounts, so once its gone, its gone, so can you really say its ‘permanent’. In economics I don’t think ANYTHING can be said to be ‘permanent’.

    Some of the businesses you mention went under, some didn’t grow, but can’t that be said of ANY business, even call centres. A number of call centres got money as well and have since left, so how is that different? I don’t think you really prove your point except that I do think its worth studying. More importantly, when Alward was elected he replaced ‘Invest NB’ and said there were going to be constant metrics to gauge its success-has anybody ever heard of it since?

    But thats more interesting about UNB, I’m not sure how they could do that. They say specifically on their homepage for international students that they can stay in New Brunswick for three years after graduation. And you need a federal graduate work permit in order to stay in the country, but they say on their website that those who are in ‘exchange’ programs do not qualify, and I think UNB has several exchange programs going on.

    According to statistics canada the change in visible minorities in Edmonton was only about ten percent. 72% were ‘white’ in 2006, while 61% were ‘white’ in 2011. So by no means is that the ‘minority’. I often feel the same way in Waterloo, especially around the university in the summertime, but perceptions can be tricky. There’s no doubt about it, its almost a culture shock going home to the maritimes.

  2. mikel says:

    ‘permanent’ meaning ‘true’.

  3. I do a lot of microfinancing through Kiva and apply something like the principles described here when I loan money.

    In general, I do not fund loans for retail, because I think adding one more vendor to the street markets or malls is not going to help their economy. Nor do I fund thing like home improvement or personal vehicles.

    Mostly, I fund agricultural (seeds, equipment, irrigation) and manufacturing (raw material, equipment). These are essentially the production of new goods, and represent income that the society would not see otherwise.

    I would also fund service industry initiatives, especially international services, but the service sector is virtually non-existent in these economies. I think it’s hard to move beyond subsistence without a good services export sector, but there seem to be few small players.

    There’s nothing for the small player in O&G and mining, of course, as these are all dominated by large companies that put almost nothing back into the local economy.

    What does this have to do with the NB economy? Well, in many ways, it parallels the developing economies I’ve visited (and microfinanced) over the years.

    With some few exceptions, the exploitation of natural resources does nothing for the economy. You need some base *separate* from that sector. Services if possible – but services require an infrastructure few governments are willing to or can afford to fund.

    Without diverting the large subsidies away from natural resources and retail, it is impossible to develop a sustainable local economy. In NB, as in many developing nations, I see little indication this is the case.

    These are regions that will continue to export raw materials and people, while the local population falls further and further behind.

    You can’t just focus on investments that “produce 3 percent growth”. You have to fund initiatives that de-risk small farming, manufacturing and services start-up. That generally means some form of income support for those that would be willing to invest their time and effort (and resources, if they have any, which they often don’t) into such ventures.

    But income support is anathema to today’s governments. They prefer funding the larger industries that extract resources. But even if we see a GDP growth, we see nothing sustainable on the ground, as little is spent locally, and the profits are deposited in offshore accounts.

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