It's The Economy, Stupid

I just listened to an excellent podcast featuring Jared Diamond and his latest publication Natural Experiments of History. Diamond is the guy who wrote Guns, Germs & Steel and another book I read called Collapse -both highly entertaining and informative.

The new work looks at a number of examples throughout history of why certain peoples or countries develop at a different pace.  He looks at Haiti vs. the Dominican Republic or whether or not Napoleon was good for the countries he took over. 

By modelling these natural experiments we can attempt to determine what large factors were influential to development and then try to apply the learnings.  Of course you have to make every attempt to control for other factors that were at play before the perturbation but I found the concept fascinating.

For example, think about Atlantic Canada.  When a few people dare to question whether or not joining Confederation was the best thing to do for this region, the typical response from central and western Canada (and many here) is indignation.  Atlantic Canada is part of one of the most successful and prosperous countries in Canada.  Furthermore, you (we) have been on Equalization for decades.  Where would this region be if not for its being part of the greater Canada?

I wonder what Diamond would think of that.  If you used his model you might find that Atlantic Canada might have been far more prosperous as a separate country.  If you read Donald Savoie’s work, you see clearly that many of the leaders at the time in Atlantic Canada predicted this region would wither and be entrenched as the poor region of the country due to Upper Canada’s political domination.  And it’s hard to deny that we have become the entrenched poor region of Canada in the intervening years.

To many folks this is an inevitable consequence of history.  The Maritime region is in a bad geography.  It has relatively little oil and gas (at least until now).  It is physically far from the centres of power and control.  Too bad.   Every country has poor areas.  Accept your destiny.

But I think that is too simplistic.  If I had the cash, I’d get a guy like Diamond to look at it. Why didn’t Halifax become Boston?  Why did this region (and I guess we can include northern Maine) stagnate while other areas boomed?

As I said before I think the next 50 years will be less kind to Atlantic Canada (if you can use that term) in terms of the generosity of the federal government.  Notwithstanding the Constitution, there is less connection here with Ottawa than ever before and and increasing number of the those weilding the power have never even been to this region.  That will only increase over time. 

I know a lot of you bristle when I talk about this stuff but I think there are short, medium and long term policy issues that need to be discussed.  Short term, this region needs a serious economic development effort that leads to significant private sector investment and builds up the economy.  Medium term we need to become less dependent on the federal government (we are at 40% of our budget in NB coming from the Feds) and longer term we need to understand where this region fits in the Canada of the next 100 years. 

I don’t think it is acceptable that this region repeat its role as the labour market incubator for Central and Western Canada.  For one thing we are having far fewer children to send west.  For another, there are longer term structural challenges associated with this stuff.

I’ll get back to the nitty gritty of economic development again but I still think we need to talk about this stuff.

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When I first went to the States in 1985 to university as a 17 year old freshman, I remember having long talks with political science majors in the dorm late into the night.  I remember thinking some of the crazy ideas (to me at the time) they were putting out there such as ‘workfare’ and, somewhat paradoxically the merits of running up the debt to keep taxes low (this was in the Reagan years).

Just about everything they advocated came to pass eventually.  My point is that the ideas debated in universities today find their way into the policy making of tomorrow. 

From an op/ed today in the TJ:

In reality, equalization transfers cash from taxpayers in high-cost provinces to governments in lower-cost provinces. The program also allows for lavishly subsidized services where they ought not to exist and thus acts as an incentive to poor provincial policy.

Mark Milke is the director of research for the Frontier Centre for Public Policy

This is the smart new line of thinking among the growing anti-Equalization crowd.  Before the arguments were based on trying to make the point that Equalization is actually a disincentive for provinces to push for cost containment and economic development.   That didn’t get much traction so the new line out of western academia is that Equalization is fundamentally unfair to the rich provinces.  I didn’t post his full comments here but you should read it.

And if that doesn’t work, they will try other arguments.

The point is that there are clear warning signs that the Equalization program as we know it likely to be radically alterned in the near future (Bernard Lord’s constitutional protest notwithstanding).  I have argued that for years there already has been an unholy quid pro quo where the richer provinces get the bulk of the  economic-development-related dollars from the Feds (EI, Invest in Canada promotion, TPC, etc.) and the poor provinces get Equalization but the thinking out of the West is even more blantant.

What they want is a full reset.  Take the poor provinces of the equalization life support, let the migration begin in droves, reset government spending around a much lower equilibrium point in the poor provinces.

I have also predicted here that by 2040 or so there will be a ‘Royal Commission on the future of the Maritimes’ that leads to the amalgamation of the three provinces and a radically reduced government and subsidy model for the region.  Many folks scoff at this prediction and I may be wrong but I watch trends as much as anyone and with population stagnant and declining and the cost of government rising by upwards of three times the rate of inflation – increasing amounts funded by federal transfers – eventually something’s gotta give.

I have also said this timetable could be accelerated if there is a prolonged recession and economic stagnation in Canada.  We may be approaching that time.

That is why I agreed with the self-sufficiency agenda.  It was the right strategy – 10 years too late.  During the Bernard Lord period in office (and the late Liberals after the budget balancing act of the early mid 1990s), we had a golden opportunity to build a new economic development model in the province based on fostering the growth of higher wage industries and keeping our cost structure moderate – weaning off Equalization.  Instead we didn’t foster new industries and we spent like drunken sailors.  The NB budget rose as fast as the have provinces during that period even though our population stagnated.

I don’t have a crystal ball but it doesn’t look too good from the perspective of government.  $800 million deficit in NB, lower tax base to pull from, the federal government warning about serious belt tightening to come and not as much business investment across North America for which to compete.  Think about it.  Just five years ago, there was such a labour shortage in the US – we could have attracted dozens of wind and solar manufacturers and no one would have noticed - now those companies are the most sought after economic development projects in North America.  I could say the same for data centres.

I’ll end for now but any government in this province that thinks Equalization is going to save their bacon moving forward is mistaken.

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One of the stranger aspects of the NB Power deal is watching committed environmentalists fighting hard against a proposal that will move the province from 63% of its electricity production from burning fossil fuels to zero within 10 years (it is possible that will be extended but the Premier on the radio would commit to only 10 years). 

And another sign we are living in bizarro world, a heard a university prof who has been advocating for environmentalism – and pushing hard for massive reductions in carbon emission in the province – arguing that the Heritage Pool is a ‘serious problem with the NB Power deal because power beyond the pool will have to be purchased at market rates’.  This should be a golden opportunity to double down on energy conservation efforts in the province.  Ask Liz Weir about just how much work there is left to be done to get our homes and businesses to energy efficiency.

I realize the opponents of the NB Power sale of its energy generation (that’s all it is now) are throwing everything at the wall to see what will stick but this is about as weird as I have ever seen.  I debated the thing with a guy the other day who was adamant that a) the deal was a greedy grab by industry to get cheap power and b) the very next argument out of his mouth was that industrial rates under the deal will be far higher than under the status quo.  Which is it?

But that actually isn’t my main point today.  It’s a lead in to another subject that I have blogged about in the past – the issue of environmental sustainability.  It is not an area where I have any real subject matter expertise but I have observations.

Why do we just assume consumption is on an upward growth trend forever?  I was at a conference a couple of years ago (before the recession) on the Atl. Gateway and the expert was confidently predicting a doubling of cargo from Asia into North America within 20 years.  I remember thinking at the time how much crap can we import?  How many cars, how many 50 inch TVs, how many toys, video games, clothes can we consume?  isn’t part of sustainability containing the demand rather than just trying to make the supply more environmentally benign?

I would say we should work to reduce consumption in North America – energy and goods.  I don’t think there is much correlation between the accumulation of stuff and happiness.  I have visited Latin America 14 times and I see no correlation. 

Some will say that this kind of talk is heretical for an economic developer.  Isn’t my goal to increase economic activity?  Yes and no.  My goal is that places like New Brunswick would have enough economic activity to support the population and the costs of our social and common infrastructure. 

Consumption – is actually at the lower end of economic value add.  Think about the economic value chain of a product like an iPod.   If a NBer buys an iPod for $200 – only a fraction of the economic activity associated with that iPod stays in New Brunswick.  The plastic used in the process is from the US, the manufacturing is from China (?), the R&D is in California, the profit is mostly in California, the marketing activity is in California, the customer service is in India (?). 

All New Brunswick gets is about $5-$10 in low value add retail wages and a little transportation activity.

Think about it another way.  If we cut our non-essential durable and non-durable goods consumption in a place like New Brunswick by a half – there would be more than enough money left over to fully implement the 100-mile diet for all New Brunswickers – at a much higher value add than consumptive retail.

Just rambling again today but in my mind these issues of sustainability, conservation, corporate responsibility and the business expection of a reasonable return on invested capital are starting to converge.

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Somebody invoked that classic Bill Murray movie Groundhog Day yesterday in our conversation about the new northern NB strategy.  Just another plan, another credenza creature while Rome burns.

Obviously I have a tainted view here but I think this one could be different.  Ultimately these things are always about what you do with them is what matters.

But to paraphrase Captain Kirk’s son in Star Trek II – words matter – we need to have a starting point in order to move forward.

I do worry that the political imperative is not necessarily the bureaucrative imperative but that is exactly why the report I wrote talked about local leadership and a stronger mechanism for the North to take more direct control over its destiny.  Again, just words but words matter.

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Thomas Friedman is calling on President Obama to create a million new entrepreneurs as a way to rebuild an innovative economy and grow out the recession.

But as we have talked about here on multiple ocassions – can you just tweak public policy or make start up capital a little easier to access or is it not that simple?

Take Atlantic Canada.  For close to 30 years the focus has been primarily on stimulating entrepreneurship.  Way back when – pre ACOA the best minds determined that if Atlantic Canada was to be successful it would have to grow from within so everyone turned the focus to creating entrepreneurs.  As a person working in and around the system for 20 years this is so.  There were (are) programs to stimulate young entrepreneurs, women entrepreneurs, minority entrepreneurs, rural entrepreneurs.  On EI?  There’s a program to help you start a new business.  On and on.  I am sure there have been dozens of different programs all designed to help people start up small businesses.

But there is no evidence this has worked.  In fact, a number of years ago I  did some research that showed almost the opposite.  In places like Alberta where there were far less government programs to stimulate entrepreneurship there seemed to be far more entrepreneurship.

I have come to the conclusion that entrepreneurship is a far more complex beast than most of us think.  I have met likely hundreds of entrepreneurs over the years and some started up to make lots of money, others started because they had what they thought was a super idea, others were in big companies and got bored wtih the bureaucracy, others just can’t stand working for a boss, others were in universities and incubated a neat new idea, others – yes I have met a few – were just desperate and started a company to make survival income and it ended up taking off.

I also think it has a lot to do with risk.    Entrepreneurs (and as I have said before I differentiate entrepreneurs from those people that want a lifestyle business and just an income) tend to be folks that like to take risks – they will cash out their RRSPs to start a business.

I have a theory (espoused here before) that successful entrepreneurial climates are those with a good mix of large, multinational firms that are training and providing experience to a class of potential entrepreneurs who get frustrated inside the large firms and end up starting their own.  The evidence in New Brunswick’s IT industry is pretty compelling.  Most of the successful IT firms in this province have CEOs and executive teams that previously had worked for large firms such as Aliant.   There are some that started up right out of university but most – the large majority – got experience and then started their own business.

But back to Friedman’s point.  Would a million new entrepreneurs create the economic renaissance that he desires or would it just move us back to a pre-Walmart time with far more smaller mom-n-pops with high cost structures because of a lack of economies of scale?   Friedman is implicitly (and explicitly) assuming these million new entrepreneurs would be Steve Jobs – but how many Apples can the economy handle?

Is there a law of diminishing returns to government efforts to stimulate entrepreneurship? 

I suspect the best model focuses on creating the enviornment where serious entrepreneurs with truly innovative ideas can emerge.  Just another pizza shop with plans to be the next Papa John’s is fine but I am not sure it should be government policy.

Invest heavily in university-industry R&D.  Focus tax policy on innovative entrepreneurship – not just encouraging anyone to start their own business.  Again, anyone who wants should be able to set up their own business but public policy should be more than just about cranking out more mom-n-pops and more about innovative products and services that are game changers in a specific market segment.

I think the experience in Atlantic Canada show us that we can’t just assume that making it easier to start a business will lead to better economic outcomes (economic development).  We need to elevate the discussion beyond just a target for new entrepreneurs (Friedman’s million) to a target for new game changing entrepreneurs.

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I like this new strategy - it is clear in its objectives and I think the opportunities identified have merit – the real challenge will be marshalling the resources needed to get it done.

There are a couple of very surprising weak spots.  The first is the strategy doesn’t mention anything about urban Northern NB and all of the targeted sectors are really about rural areas in the North – with the possible exception of tourism.  Of course, the authors of the plan will say that rural success will have urban benefits but I think they really missed the boat on this issue.  Northern New Brunswick needs to have strong (albeit small) urban areas. 

The second weak spot is there is not a single industry mentioned herein that is in the white collar/professional economy of the 21st century.  We can’t just give up on this – it’s tied to the urban strategy mentioned above.   Don’t get me wrong, I think the primary potential is in manufacturing and resources sectors and it is true that I have preached focus, focus, focus for years but something tells me that there are some niche opportunities that could be exploited for economic development.

Take this line from page 8 of the report - “bilingualism is one of the great strengths in attracting business to the region”.   I realize people like to use this as a throw in but sometimes we have to think through what we say.

If bilingualism is a ‘great’ strength (and I believe it to be true) why aren’t we targeting opportunities that leverage it?

But on the whole this could be a giant leap forward for the North.

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It’s a broad topic and I won’t cover it in detail today but I have been thinking lately that we need a new social contract between the business community and government. You will excuse me if I seem a bit incoherent but this is a work in progress in terms of my thinking.

I am in a pretty interesting position in that I get to interact with all sides – government, industry large and small, universities and NGOs in the Atlantic Canadian context and I see a widening gap between them and it is increasing friction.

I’d like the business community to come out strongly and say we don’t mind paying taxes – we realize that we need strong community and social infrastructure for us to have successful businesses so we do not mind paying taxes at all – as long as they are reasonably similar to other similar jursidictions.

I’d also like the business community to be more explicit about corporate social responsibility.  A lot of big companies have CSR policies but I’d like to see it far more pervasive.  Specific to New Brunswick, I’d like to see our companies (and many do) be far more engaged in broader community objectives.  What is the point of having a wildly successful business if the community around it is crumbling? 

There’s more on the business side of the contract – environmental, etc. but any contract has two parties.

On the government side (as the representative of the people as a whole), I would like to see government acknowledge that a strong successful business community is fundamental to strong and successful societies.  Specifically to have a more explicit understanding of how public policy impacts the business environment and the value proposition for investment in a place like New Brunswick.

How about a simple agreement that businesses have a right to make a reasonable return on their invested capital over time?   Companies and people can invest their money just about anywhere these days and we want New Brunswick to be a place where they want to invest and feel they can make a good return on that investment. 

I’m tired of the old cliches – businesses just want to cut taxes and regulation and the role of government is to protect the people from the evils of business.  That sentiment should have run its course by now but it is back with a vengence.

Last weekend I heard a very articulate person on a roundtable discussion talk about the need for government to stand on the side of the people against the corporations and their greed.  By now we should realize that ‘the people’ (and I am not sure who these pundits and experts think the people really are) need to work and unless we follow a communist model – the bulk of them need to work for those corporations.  So let’s set that as a foundational element of society and then figure out how that relationship can work most effectively.

Not that long ago I had a business leader (I hope he doesn’t read this blog) tell me he just wanted the government to get out of the way and let him build his successful business.  He and that lady from the roundtable are the end points of the spectrum and we need to find the middle ground.

Again this is not well formed but I have been thinking in these terms for a while now.  I reject Naomi Klein (although many of her points have some merit) and I reject the notion that businesses can do no wrong.  Government should protect the public against bad corporations as it should against bad people (criminals). 
But the starting point shouldn’t be that government’s main goal is to protect the public against corporations any more than its main goal is to protect citizens from citizens.

If you have a society of murderers – having laws against murder is basically irrelevant.  We assume that the vast vast majority of people in society believe that murder is fundamentally wrong and the laws are there to protect against the few.

Enough rambling for now but you can expect more in the coming weeks on this subject.

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The Globe & Mail is reporting on a new deal between the Ontario government and Samsung:

South Korean industrial giant Samsung Group will invest $7-billion in Ontario to build 2,500 megawatts of wind and solar power.

Samsung and the Korea Electric Power Corp. are receiving a generous sweetener of $437-million. But the so-called economic development adder is conditional on the group creating manufacturing jobs in Ontario.

Under the deal, the Samsung group will operate wind and solar power plants in Ontario over the next 20 years.

In addition to the sweetener, the group will receive the going rate for the electricity it produces – 13.5 cents a kilowatt hour for wind and 44.3 cents for solar.

The Samsung group is promising to create 16,000 jobs in a province whose manufacturing heartland has been hit hard by the global economic recession. But only about 4,000 of those jobs will be permanent.

There are a few interesting points about this.  2,500 MW is a very large project but it still only represents 6% of Ontario’s electricity needs (projected need by 2025).  I point this out because it is very clear that wind, solar and tidal energy – by even the most aggressive policies like Ontario are still only going to make up a small portion of generation by 2025.  In Ontario’s case, they are projecting about 15% in total will come from non-hydro renewable energy by 2025.

Ontario is 15 times larger than New Brunswick so on a scale basis this Samsung project would amount to about 166 MW in generation here.

The bigger issue is the job creation.  This is old time time industrial policy.  Paying $437 million up front and giving a guaranteed market for power for 20 years at premium rates 13.5/kwh for wind and 44.3/kwh for solar.  This is a huge government subsidy to sustain 4,000 manufacturing jobs.  

Again, if you scale this it would be equivalent to a manufacturing project that created and sustained 266 jobs here (4,000/15) but I think it is an important objective to tie the manufaturing and direct job creation in green energy to energy policy objectives.

The Globe and Mail had a very good article on this last week.  The Hydro-Quebec MOU is providing 14 TW of power to New Brunswick at 7 cents a kwh, Ontario is bringing on new green power at between 13.5 and 44.3 cents/kwh. 

The government of Ontario will say they are getting cheap power from hydro and from Bruce Power (nuclear) to offset the high cost green energy and that the green energy is tied to a longer term economic objective (thousands of jobs in the sector).

You know I favour ambitious sector development efforts.  I am not sure this is a particularly good one -  but I don’t know enough to see all the angles.  It seems to me that making Ontario consumers pay 44.3/kwh for wholesale solar electricity (the retail price now in Toronto is around 12/cents a kwh) will end up being a high price to pay for the new jobs created (in addition to the $437M). But a high percentage of Ontarioians heat with natural gas and there is also the feed in tariff model that is coming online so in the end who knows?

But again back to industrial policy.  If New Brunswick took such a focused approach to sector development I would be supportive.  In addition to Samsung, they are spending hundreds of millions on other projects in this sector (in addition to the guaranteed markets). 

I think we should be deliberate and intentional about developing a few key sectors here.

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Sometimes I really do feel old.  I remember over a decade ago – probably more like 12-13 years ago researching micropayments and how that would be the future of Web-based transactions.

I see that the NYT is looking to charge for its Web-based content starting next year but they haven’t figured out how to do it or what to charge.

There was a time when people were very keen on micropayments (before the IT bubble in 2001).  Take the NYT.  I would have a web-based subscription tied to a credit card and would pay 5 cents to read a David Brooks column or seven cents to read the front page stories, or whatever.  The idea then (and I don’t understand why not now) was that the transaction costs would be virtually nothing (the cost of a Web-based e-commerce server pinging VISA to see if I have money to pay the five cents) and thousands of people paying for just the content they wanted to see (supplemented by ad revenue) would provide a sustainable business model.

It’s kind of like iTunes but even on a more chunked up basis.

There was a time when industry executives were pitching this model for television as well.  You pay for just what you want – 50 cents for 30 Rock, $2 for new movies, 15 cents for the National.

I think it is where we should have gone but never did.

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Two years ago Moncton and Fredericton were on the ICF list of top seven intelligent communities – now there are none. 

Someone told me the short list of 20 communities was very strong this year and that is why Moncton  may have been edged out. 

Here is the list for 2010:

Arlington County, Virginia, USA
Dublin, Ohio, USA
Dundee, Scotland, UK
Eindhoven, Netherlands
Ottawa, Ontario, Canada
Suwon, South Korea
Tallinn, Estonia

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