It's The Economy, Stupid

I wrote a column a few weeks back lamenting the fact the Globe & Mail didn’t put regional development on its list of “discussions we need to have” as a country.   Now the Globe is back with “the next discussion Canada needs to have” in the form of a poll and these are the options:

• The future of First Nations
• Climate and environment
• Urban transit
• Changing the electoral system
• Ending poverty
• The future of higher education
• Caring for seniors
• ‘Right-sizing’ government
• The future of jobs
• Foreign aid

It would seem to me that a ‘discussion’ Canada needs to have should be one that has national implications.  It should be a discussion that resonates nationally.  

I realize I’m a bit of a one trick pony here but it would seem to me that regional development should be a ‘national’ discussion.  If you think about the frenzy that equalization and transfers is whipping up in the west.  If you remember McGuinty’s ‘fairness’ campaign and the changing of transfers to ‘per capita’.  If you think about the fact that Atlantic Canada has slipped into population declined for the first time since Confederation. 

Regional development is a fundamentally national issue.  No matter where you stand on the debate, having one rather large region of the country slipping further and further behind should be a matter worthy of discussion at least to the level of ‘foreign aid’ or ‘urban transit’.

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What is amazing to me is that a lot of folks don’t seem to understand the most basic concept when it comes to cooperation:  it has to provide some type of mutual benefit and it can’t be seen to be giving too much of the benefit to one of the parties involved.

I talked about Galdwell’s work on this in the past.   If two people are given $100 to split but the catch is they must both agree on the split amount, people will turn down $5, $10, even $30 - new money to them – because they other guy is getting $95, $90 or $70. 

At a utilitarian level, this makes no sense.  $5 more for me is $5 new money.  I should be happy to take it.  But it’s not fair -and I am willing to give it up to put the screws to myself to get the guy who greedily wanted the $95.

This simple principle is missed at just about every example of ‘Atlantic’ cooperation.  Atlantic Gateway?  Why did this effectively die?  Because three of the four provinces thought one was getting the most benefit.  Even though three three would be enriched, the Gladwellian principle dominates.

Regional energy development?  Laughable without some very strong mutually beneficial – equally beneficial – outcome.  The HQ deal would have given New Brunswick a significant competitive advantage on electricity rates - no one disagrees with that – for at least 10-20 years but it would have also made it much easier for PEI and NS to buy cheap electricity from Hydro-Quebec.  Doesn’t matter.  A huge advantage to one province and little advantage to others – led to the hue and cry from Nova Scotia.  And this makes sense.  It is exactly the response that I heard when talking about the new Nalcor/Emera deal last week.  New Brunswick experts tell me this deal will be great for Nova Scotia but less so for New Brunswick.  Despite Premier Alward’s public eagerness, this deal will have marginal benefit for NB and actually could set back opportunities.  There was talk of a large natural gas fired electricity plant shipping power from SJ to Nova Scotia.  That is essentially dead.  But, again, where was the Gladwellian compromise in that?

You can tick off all the opportunities for cooperation.  Health care services (delivery and back office).  Think about the furor over blood supply.  Several people familiar with this said it was far more about the job losses in Saint John and the prestige than about economics.

Immigration, economic development, cluster development, investment attraction, R&D agenda – on and on and on – each time it’s tried, one province seems to get a little ahead, the rest get cold immediately.

I propose a clean, quid pro quo system adjudicated by an independent panel from all four provinces (or three where it makes sense).  I know this sounds Soviet but hear me out.

We close the blood services in Saint John (let’s say losing 20 jobs) and we move the milk testing service for the Maritimes to Saint John (let’s say gaining 20 jobs).  Ooops, no gain for PEI.  We slip them 20 jobs processing regional permitting for something.

We want to do a ‘regional’ energy play?  We get all provinces in the room and work it out in advance – not announce a $6B deal or a $10B deal and then announce that it will be ‘good’ for the other provinces.

We centralize the health care back office jobs on PEI, health care IT development in NB and advanced health care delivery in NS.  I can already see some people bristling at this.

My point is that there must be quid pro quo.  There has always been a beggar-thy-neighbour attitude in Atlantic Canada.  When Saskatchewan booms, bully for them.  When Nova Scotia gets a little ahead, jealousy abounds.  Same thing goes the other way on numerous files.

Cooperation must equal mutually benefiicial and equitable outcomes or you are just whistling dixie.

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Whenever a high profile provincial premier retires, there is a brief speculation about his/her federal intentions.    I suspect that this will not be the case with Danny.  He was master of his domain in Newfoundland that he would never match in Ottawa – even if he got to sit in the big chair.

Plus, his approval rating in NL is probably unmatched in history – he is even well loved in New Brunswick – but across Canada I suspect his bravado wouldn’t be much of a selling feature.

He did some good things, some strange things and overall elevated the reputation and role of NL in Confederation.  He was helped with billions in offshore oil and gas revenues – one has to wonder what would have happened to the province without the oil.  As it is the province lost something like 11,000 population under Danny.  It could have been much worse.

I think his lasting legacy will be Nalcor.  Imagine a provincial government corporation that is involved in onshore and offshore drilling, electricity production and transmission and a variety of the efforts.  

And his battles with Quebec.   The truth is that the billions spent to develop Labrador power and bring it down through Nova Scotia shouldn’t be necessary.  It would save billions – billions that would go into the coffers of Newfoundland - to work with Quebec to bring it through the Belle Province but when honour is at stake – it ain’t about the money.

I think I’ll miss old Danny Chavez.  His style of politics is fading away.

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My column yesterday was on shale gas and my view that we need to treat that industry as a once-in-a-generation economic opportunity that could end up creating thousands of jobs and hundreds of millions in tax and royalty revenue to pay for our public services and renew our rural economy.

Predictably, I got several emails complaining about my view and there were also a few comments on the site – all negative.

I cited the Pennsylvania Environmental Council which is calling for stringent new measures on shale gas drilling in that state but I was particularly interested in the CEO’s comment that shale gas “is a once-in-a-generation energy and economic opportunity for Pennsylvania [and] we have a deep historical, political and fiduciary responsibility to get this right for the citizens.”

I wondered out loud if New Brunswick’s environmentalists (and, it seems, all our geologists and energy experts) feel the same way about shale gas in New Brunswick.  If they do, I haven’t seen or heard any commentary in that direction.

20% of all the nat gas in the U.S. now comes from hydrofracking.  Have there been problems in certain areas?  Yes.    But it seems to me there are best practices out there and we need to employ them here but we shouldn’t try and force out investment just because.

It just seems to me that many of us have disconnected the absolute requirement for an sustainable economic foundation under our social and community objectives.    I wonder if we were personally in serious economic hardship we wouldn’t be so cavalier about some of this stuff.  Well, as a society, we are facing serious economic hardship – and not just because of the deficit. 

This has never been about enriching fat cat investors or millionaires.  They will invest their money wherever they think they can get a good return – here or elsewhere.  This is about the people in our communities.  It’s about meaningful and good paying work.   It’s about trying to ensure that some of that global capital that is roaming the globle looking for investment opportunities is used here to sustain our economy and our communities.

Some of us will just have to disagree on this point but I hope we can disagree agreeably.

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I heard Don Roberts – the CIBC vice chair and forestry industry expert – give a talk on Friday.  I had read his stuff but that was the first time I heard him talk.  He has a clarity in approach that is refreshing and he backs up his conclusions with strong research.  

I found one of his slides interesting.  He was talking about what investors want when they are considering investing – in anything – a province, a specific project, an unproven technology.  They want, in his words, TLC – transparency, longevity and certainty.

I thought this was a very good way to look at economic development.  Companies that could be investors here – it doesn’t matter to me where they come from – Tracadie, Toronto or Toyko – want to know there is transparency (no hidden surprises that will end up threatening the viability of their investment in the province), longevity (they have a reasonable expection that their investment is secure) annd certainty (they can expect that the government won’t change the rules of the road after the company invests here that hurts the viability of their investment here).

Some people are uncomfortable even talking about the role of government here.    They see no need for government to think about ROI or ROE.  The government is in the business of providing public and social services not worrying about business success.

But business success is at the heart of economic development which is a necessary precondition for social and community development.  How can we have successful social development without a relatively strong economy?

It seems to me that government – in a serious way – needs to understand the economic environment facing our key, exporting industries whether it’s forestry, mining or ICT.  These industries need to be able to make a buck here – need the TLC that Don Roberts talks about – or else over time they will not invest here.

I am not as worried about the companies that serve only local markets because they are facing the same cost environment.  If energy costs rise – it rises for them all and doesn’t impact competitive advantage.  However, the companies playing on a world stage don’t compete in New Brunswick – they compete with firms in those external markets.  Any cost, regulatory, currency, etc. shocks directly hurts their competitive advantage.

It seems to me that we should apply the same thinking we would place on our own personal investments.  We expect a reasonable return on our investments (subject to our risk profile) and expect our financial planner or whomever to invest properly on our behalf.   Our companies should expect – over time – a reasonable rate of return on their investment in New Brunswick. Now, some of them will embark on bad or risky business models and will end up bearing the imapct of that.  It is not the government’s role to bail out companies that get involved in bad business models.

It is the government’s role to try and ensure it doesn’t cause the problems with a company’s business model – particularly after the company invested here in good faith.

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Someone asked about data centres in the threads.  The truth is that a bunch of us were pushing NB to get out front and become an early adopter of this sector almost a decade ago.  With the advent of large scale but not critical data storage (the banks always had ‘data centres’) like YouTube videos there would be exponential growth in this area.  I think the first formal briefing I did on this sector was in 2002.

But the truth is that it has always been about about cheap electricity.  A good sized data centre uses as much power as a small pulp mill and energy costs can be as high as 60%-70% of annual operating costs.

In the early 2000s New Brunswick’s large industrial power rates were reasonable but still above Quebec or Manitoba or BC not to mention 20 or so U.S. jurisdictions.  By 2010, they are completely out of whack for attracting this industry.

We have looked at alternatives such as incentives to allow these firms to produce their own power (Google is a federally regulated electricity utility in the US) or zany ideas about using Bay of Fundy water to cool the data centres (cooling is a huge part of the cost) but in the end if you have a power bill of $10 million/year in New Brunswick and it would be $5 million in Washington State or $4 million in Manitoba, where are you going to go?  Iceland – with its cheap geothermal – has been attracting them as well.

I think this is an important and instructive example, however, for at least a couple of reasons.  First, we need to be looking at potentially high growth sector opportunities that lie just over the horizon.  That is why we gained such traction with the customer contact centre industry.  It takes more than just identification, however, as New Brunswick was also among the first jurisdictions into things like aquaculture, GIS and eLearning and we never really saw those sectors blossom into real growth engines for the province.

So the value proposition for investment in these sectors is critical and we don’t have the value proposition for data centres.

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I was a guest on The Rutherford Show yesterday – I believe it is carried on a number of Alberta radio stations.  He asked me if I think that Maritimers are lazy – because of a comment I made in a National Post article.

In my experience, Maritimers are not lazy.  If you think of the careers in the forestry, fishing, mining, etc. sectors – not a whole lot of lazy people there.  Plus, when I used to be involved in attracting firms to New Brunswick they would tell me their local workforce here was harder working, more productive and more loyal than anywhere else.

In addition, we have Stats Can data confirming that employed NBers work as much – on average – as anyone else.  The following table shows the average weekly hours worked for all workers paid by the hour (full time and part time) including overtime in 2009.
Average weekly hours for employees paid by the hour

Source: Statistics Canada Table 281-0033. 

We still have more people working in seasonal industries than most other provinces but those industries don’t conjure up images of laziness in the mind.

When I said lazy, I was referring to lazy in the public policy sense.  If Ontario had New Brunswick’s economic development profile over the past 20 years, it would be an international crisis.  The Canadian economy would be dragged down.  The feds would set up ACOA-like organizations in southern Ontario (oops they did that already).

But when it’s New Brunswick, that is somehow expected and normal.  That’s what I meant by lazy.

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One of the lessons that economists are taught is not to equate correlation with causality.   For example, there may be a strong correlation between wealthy people and Italian shoes but that doesn’t mean that wearing Italian shoes will make you wealthy.

Take this new report on ‘stealth’ equalization.  The report’s author finds that the federal government spends more money in Atlantic Canada – per capita – than in Alberta.  Then he concludes:

The bottom line, Mr. Eisen said, is that “have-not” provinces are “trapped in a situation of low-level private-sector dynamism,” essentially “propped up” by massive government employment that saps the young, talented workforce.

Now, this conclusion may be true – but there is no way he can conclude this from the data.  The study does not prove any causality between federal spending in Atlantic Canada and a ‘low level of private sector dynamism’. 

It’s intellectually lazy.

I suspect the economic situation in Atlantic Canada – now really the Maritime Provinces because Newfoundland is a ‘have’ province – is based on a far more complex equation driven by a variety of variables.  It seems to me the higher government spending here is an effect rather than a cause of a chronically weak economy. 

I have said it before that government has stepped in and tried to prop up the economy in this region with more spending to make up for weak private sector growth.

Sound familiar?  It should because that is what every country in the OECD did in the wake of the economic downturn.  It was called fiscal stimulus.  When we do it nationally, it’s good economic policy. When it is done in New Brunswick, it is bad economic poicy.

But the journalist in this story got my point across.  The real issue is what is the right policy framework that would lead to economic development in the Maritimes?    Because if someone in Alberta is suggesting we should accept our fate and watch our region wither and die – that is unacceptable.  It is just as unacceptable as if Alberta was asked to accept its fate and die.

She missed one little point in the article.  I said that I had been watching politicians and community leaders in Atlantic Canada play the victim card for 20 years and it was kind of fun to watch western Canadian politicians playing the victim card.   

Richard Currie talked about the rich uncle – what does it say about the rich uncle when he is bitter and resents the poor nephew and wants to impoverish him even more?

Now some in the West say they are genuinely interested in their Maritime cousins and their demands to reduce equalization are meant to help us get off the hind teet and unlock our entrepreneurial spirit.   

I’m ready to test that theory.  Let’s have at it.  Why doesn’t the federal government partner with the NB government on a brand new economic development agenda that includes tax breaks for targeted industries (like the oil sands in Alberta), massive investment in R&D in targeted sectors (the feds spend less on R&D in New Brunswick than any other province), the attraction of global companies to New Brunswick (why don’t you go and check how many of the multinational firms attracted to Canada with the help of the federal government have ended up in New Brunswick over the last 20 years – I’ll give you a hint – it starts with z) and an overall commitment to helping New Brunswick build its own tax revenue generation capacity to limit its exposure to transfers.

How about that?

Last point.  If we are in the stealth business, here are a few tidbits to consider:

*$4 billion in federal agriculture subsidies to Alberta – 90% more than New Brunswick – stealth.

*It costs New Brunswick $40,000 to pay for the university education of a single New Brunswicker and something like $100,000 to pay for their entire education k-university  - who promptly moves to Alberta – NB is subsidizing Alberta’s educated workforce.

*Several studies have shown that federal tax breaks to Alberta oil & gas producers have been worth billions in recent years.  The feds have no tax breaks for New Brunswick’s growth industries.

*There are dozens of federal programs -such as the biofuels funding – that are biased towards western Canada and pour hundreds of millions in subsidies into that region.

I wonder if all that is sapping their economic development potential?

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I have been reading about the new crop of Brazilian firms that are investing abroad – mining, manufacturing, construction – even services.  As someone who has been travelling to Brazil for almost 20 years it has been an amazing transformation. 

In the early 1990s during the hyperinflation, I remember seeing 10,000 cruzeiro bills washing down the street in the gutter because they were almost wothless.  When we would eat at a restaurant, people would pay by cheque and it would cost 980,000 to eat lunch or something similar.

Since Cardoso and his initial policies through to Lula, that country has transformed.

I am always looking for ideas that we can graft onto New Brunswick and I like this concept of company’s building up business expertise and capacity in a local area – like New Brunswick – and then taking it outside the province and building a major global player from New Brunswick.

We have, of course, many examples of this from the Irvings to the McCain’s but we don’t have many in the recent past.  I can name 50 firms that built up something interesting in New Brunswick but then sold off to a firm based elsewhere - from engineering to manufacturing to software firms – but I have difficulty thinking of any that have started here and acquired others outside. 

I know there are examples of this.  I posted on this topic before and I got a few smaller but good examples.

But I do think that as we think about economic development we need to grapple with this idea.  Edmonton Tel (EDTel) became Telus.   NBTel became a small operating division within Bell Canada. 

Are there any policy tools, or seminars or education or mentoring or anything – that can influence this kind of ambition or is it up to the fates? 

New Brunswick is a small province so we don’t need hundreds of new McCain Foods springing up but a couple of dozen would be interesting.

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