It's The Economy, Stupid

Here’s a really good article in National Geographic about the efforts to develop the shale gas industry in New Brunswick.   It focuses on the partnership between the Southwest Energy and their leading edge environmental efforts in New Brunswick.

The Conservation Council has tweaked their concerns from contaminated water to the “industrialization of our rural landscape”.    For me this was the main issue all along.  The commentary made by some local people to journalists was they didn’t like the trucks going down the road.    The problem that doesn’t sell nearly as well as Gasland and tap water blowing up.

Every time I mention shale gas I get pilloried here and even more so in the comments below my newspaper columns but I continue to believe that this industry could be a very important economic catalyst for this province and we owe it to our citizens and future generations to find a way to develop it responsibly and to the maximum benefit of New Brunswickers.    It will cause some disruption – as does forestry, as does fishing, as does mining, as does wind farms, as does tourism.

In the end all economic development is a kind of trade off.   I suppose New Brunswick could position itself as one vast forest with no industry at all.  People would have to move out even faster than they have in recent years but it is one way to go.

I still think about that guy who told the CBC journalist that “I retired back here and I just want to be left alone”.  In many ways that is the battleground that is shaping up in New Brunswick between an older population that just wants to be left alone and a dwindling younger population that wants to have economic opportunity here before they retire.    The former is  becoming a huge voting block.

The trouble with that theory is when I actually talk to New Brunswickers in their 60s and 70s and even 80s they mostly say “bring on the development”.    My own mother (72) told me she would be happy to have gas drilling on her land if it kept her health care system in place.   Even at 72, she is troubled by the state of the public finances (I may have primed her a bit….).

Last point before I end this.  I get tarred as an anti-Conservation Council, anti-environmentalist guy but the truth is I see an important role for environmentalists in New Brunswick.

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There’s a guy who writes a blog where he summarizes every day all the latest research into a wide variety of economic and social issues.    I have it as one of my tabs when I open Google Chrome every morning.  It’s very interesting stuff.  There is a pile of research on issues of interest to an economic developer.

One of my fascinations relates to how a region fosters an entrepreneurial culture.  I am interested in that sweet spot beyond lifestyle or home-based businesses where insatiable entrepreneurs look to build products and services and take them global.

The blog today summarizes new research in the U.K. that suggests the tendency to be an entrepreneur may be influenced by genetic variation. Sensation seeking is more common among entrepreneurs than among the general population.

Twin studies show that the tendency to be an entrepreneur is heritable and that common genes influence both sensation seeking and entrepreneurial tendency (Nicolaou et al. Manag Sci 54:167-179, 2008a; Strateg Entrep J 2:7-21, 2008b). Since dopamine receptor genes have been associated with novelty seeking/sensation seeking (Benjamin et al. Nat Genet 12:81-84, 1996; Ebstein et al. Nat Genet 12:78-80, 1996; Noblett and Coccaro Curr Psychiatry Rep 7:73-80, 2005), and attention deficit hyperactivity disorder (ADHD) has been reported to occur at greater rates among entrepreneurs, we examined the association between five dopamine receptor genes and four ADHD-associated genes, with the tendency to be an entrepreneur in a sample of 1,335 individuals from the UK. We found a single nucleotide polymorphism (rs1486011) of the DRD3 gene on chromosome 3 to be significantly associated with the tendency to be an entrepreneur. This result is the first evidence of the association of a specific gene with entrepreneurship. Further studies are needed to replicate this association.

ADHD is a predictor of entrepreneurship?  I guess that makes some intuitive sense when you meet some of these amped up entrepreneurs.

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Every once in a while I find myself explaining what is a fundamental concept in economic development but one that is so hard to grasp for a lot of folks – many of whom are in positions of influence.  There should be a little primer book on economic development that everyone in a position of influence should have to read.

The issue in question today was around the incremental economic impact of certain industries.  The best way to explain this is with an example (I was dealing with a different, but similar industry today and I don’t want to annoy a potential client).

Not that long ago the national association of convenience stores prepared an economic impact report on their industry claiming it created thousands of jobs and hundreds of millions in economic activity for the country.  They had a multiplier in there and tax revenues generated -as I recall – the whole enchilada.

Now, I have no problem with this type of analysis – in fact, I have done this for certain industries – but I prefer the term economic footprint (I stole this from the Conference Board) rather than economic impact because the latter implies the convenience store industry’s share (footprint) of the economy while economic impact implies there would be a negative impact if the industry disappeared or downsized.

The truth is for the convenience store industry and most local service type industries if they disappeared people would just shift their spending elsewhere.  If there were no bowling alleys, people would just go to the movies more.  If there were no restaurants, people would just buy more groceries, etc.   There are some exceptions and other issues but, in general, this is the case.

To be more clear, differentiate the convenience stores from auto manufacturing, or software development, or wood products manufacturing, or a large IT support centre servicing a national market, etc.  If those industries close down, the community loses all the economic activity – it gets shifted outside the jurisdiction altogether.

This matters on wide variety of fronts from tax policy to access to capital programs.

Industries that service local markets are wiser to make the case for the importance of the service per se rather than trying to make the case that if they were not around, there would be an economic loss.  We need convenience stores, and architects, and local consultants, and plumbers, etc. etc.  They are important to the functioning of a local economy.   The car manufacturer, or the paper mill or the software developer is not vital as a service to the local economy but are critical to economic development.

We need the right mix of both – industries that service local markets and those that export their products/services and bring the money in.

So the final point I was making to the potential client was is there a way to make this specific local industry – an export industry too?  Then you get a double whammy.  For example, if we had a strong, vibrant local engineering industry where a number of companies built up enough expertise to export their knowledge and technology outside the region.  Then we have an industry that is carving out its economic footprint locally but also having a broader economic impact.

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Probably the most common question I get is “why would company or industry x want to ever locate in New Brunswick”?  People intuitively understand investing here in forestry or mining or some other natural resource but they can’t get their head around why a manufacturing firm, a computer animation firm, a data centre firm, or any other firm that is not fully dependent on the local market (for customers or raw materials) would locate here.

In fact, I think that explains the psychology behind the small, local business obsession in New Brunswick.  The idea is that these firms are loyal to NB because their owners are from here. I think, broadly speaking, that is true but there also has never been enough of them to provide the economic foundation we need.

So we have to change the question to “why aren’t they locating here”?    Stopping well short of trying to ‘buy’ in companies to move here, we need to put a strategic focus on building the broad value proposition for investing here in targeted growth industries (local, national or international firms).  I’ve never thought that enormous subsidies work but government investment in the broader infrastructure and attributes of a growth cluster does seem to have efficacy.

Take renewable energy in the U.K.   I’m not going to get into the merits of broad subsidization of the industry through arbitrarily high rates for end customers, that is a public policy issue that actually sits outside economic development considerations.  A jurisdiction may accept high power rates and the effects on industry to pursue some higher societal goal.    For this post I am talking about building the broad attributes that turn an industries in to a large scale economic driver for a jurisdictions.

This Economist article discusses the case of Glasgow (I hope you can read this I have a subscription so I can’t tell).

Like other forms of manufacturing, however, this one is cyclical: turbine-makers were badly hit by the recent global downturn. Glasgow’s slice of the action might prove more durable. In 2009 Scottish and Southern Energy (SSE), a utility, founded a renewable-energy research centre in the city; last year Mitsubishi, a giant Japanese firm that is rapidly building a big renewable-energy manufacturing capacity in Europe, decided to join SSE in funding the centre, which will employ 400 people. Iberdrola, the Spanish owner of ScottishPower (another utility), and one of the world’s biggest generators of renewable energy, has placed its global offshore-wind headquarters in Glasgow. Gamesa, a Spanish turbine-maker, is to set up its own research facility there.

I love the word ‘durable’.  It’s the holy grail of economic development but beyond semantics the word assumes there is enough strength in the cluster that it will be among the last to fall during a downturn.

Why the rush to a post-industrial city on the other side of Scotland from the renewable action on the east coast? ScottishPower and SSE have helped, by cultivating skills in the sector and drawing in contractors, such as Gamesa. The biggest asset, however, is Strathclyde University.

The university’s electrical-engineering department is probably Britain’s best. Four utilities fund research in its Institute for Energy and Environment which, with 210 staff, claims to be Europe’s largest such outfit, equipped to take new technology from design to operation. This pre-eminence is in large part the work of Jim McDonald, formerly the department’s head and now the university’s vice-chancellor.

Mr McDonald spent eight years in the power industry before entering academia. He is adamant that universities should be as concerned with practical as theoretical innovation and has championed collaboration with manufacturers such as Rolls-Royce. He wants Strathclyde to be the world’s top energy-research hub. He is set to announce £112m in extra research funding, some 40% of it from industry. Glasgow has seen some rough times, he says, but it “has always been an engineering city and it will be even more so in the future.”

There are many layers to the Glasgow story but I love the idea of a smaller university becoming the ‘best’ at some form of research linked to a growing cluster in a jurisdiction.  This builds durability.   I love the notion of the university as an attractor of global firms to do research in a smaller jurisdiction.   How many global firms have research partnerships at UNB? or UdeM?   If New Brunswick wants to grow its shale gas industry, for example, its universities should be attracting the R&D of the large global firms that are already here in New Brunswick on the E&P side.  I would say a critical component of any targeted growth industry should be the role of universities and R&D.

I also like the role of the electricity utilities as attractors of investment.  Not just wind farms – that’s low hanging fruit – but using leverage to attract a wider range of investment (manufacturing, R&D, IT, services, etc.).  I still think it would be nice for NB Power to have a VP of economic development – or at least a VP with economic development responsibilities.    Many argue that NB Power’s business model precludes this but, then, change the business model.

In the end a big part of the Glasgow story in this sector has been the ability to leverage large assets like universities, power companies, etc. into attracting global firms and building depth and durability into a targeted industry cluster.

It’s a nice story.

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I am not particularly comfortable musing about broader concepts for which I have little expertise but I think they do inform the broader conversation about long term economic development so I will soldier on.

I listened this morning to an LSE podcast where an economist was lecturing on the ‘haves and have nots’ and making a persuasive case for greater focus on inequality around the world.

There were a couple of particularly interesting points.  One, he said that rich people tend to be very interested in the concept of poverty and poverty reduction but disinterested and maybe even threatened by the concept of inequality.

I see some parallels in Canada when it comes to the whole transfers debate between provinces.  Ontario politicians and pundits have traditionally been a supporter of equalization as a ‘poverty reduction’ issue in the sense of its use as a way to ensure all Canadian citizens have good access to public services (I realize this has been changing in the past decade or so but I would say historically this has been true).  They have not been supporters of ‘equality’ in the sense that all provinces should have some relatively similar economic performance.   In fact, there have been times when they have been quite hostile to efforts meant to revive the economy down here.   I have always maintained that if the federal government put their support behind multinational companies expanding in Atlantic Canada, they would get serious push back from leaders in Ontario.  They don’t mind ACOA dumping millions into small firms here but if big auto manufacturers, or aerospace companies or pharma or whatever were attracted to Canada – and then given federal support to locate in Atlantic Canada – you would see the fireworks on full display.  ”They take our tax dollars to steal our jobs” or something similar.  In my view, this is loosely similar to the global poverty vs. inequality debate.

The second interesting point is that this economist said that migration from poor to rich countries was one of the two ways to foster more equality around the world.  He is of the view, we have discussed it here, that rich countries to should open the door to millions of new immigrants from the poor countries (I think this was the conclusion of a UN study a while back).  For me, this is the Alberta view within Canada.   Forget, transfers or economic development in Atlantic Canada, we have the jobs in Alberta so why not just encourage people to migrate to the jobs?

But an LSE student posed a great question.  Wouldn’t this brain drain from poor to rich countries just make the problems in the home country worse?   He kind of hedged on this point and talked about forcing immigrants to go back to their home countries for a period of time after becoming more affluent in the west.

I think this is the issue in Canada.  We have witnessed a large scale out-migration from Atlantic Canada – and that may have raised the average income level of those out-migrants it hasn’t done much for their home region here in Atlantic Canada.

It’s an interesting discussion.  Certainly the global issues are far more severe but there is an interesting parallel, it seems to me, in Atlantic Canada.

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Someone asked me to comment on David Brook’s column on the experience economy yesterday.   I know some of you are not fans but I find his stuff thought provoking.

The column makes the case that Americans for the past 40 years have focused more on ‘meaning’ than ‘making’ money.  He concludes with this line:

During these years, commencement speakers have urged students to seek meaning and not money. Many people, it turns out, were listening.

I think Brooks is calling for Americans to pull themselves up by the bootstraps.

I guess you could say that people are mostly a product of their environment and I was never that enamored with the historical American obsession with making money.   I have friends and relatives down there (I lived in Virginia for six years) that are almost singularly focused on generating wealth for themselves – some working 2-3 jobs, some investing every spare nickel in speculative real estate, etc.  And a few of these folks – ex-NBers to be exact – spurn New Brunswick’s lazy lifestyle and dependent attitudes.

What I am saying is that I think the search for meaning does trump the search for money but you need a base load of economic activity to allow yourself to search for meaning.    It’s Maslow’s hierarchy of needs all over again.  If you can’t get the fundamental economic base right, you will not be able to get to self-actualization.

That’s my point about New Brunswick.  I love the fact that most people don’t want to work 1000 hours a week and that most seem to have a pretty good work-life balance.  I think we need to think about quality of life as more than just a straight economic equation.    Just piling on the cash it seems to me is a shallow world view.  But that may just be my Baptist upbringing.

But, and there is always the other side of but:

New Brunswick needs a base of economic activity to support its broader community and quality of life objectives.  That’s why I spend my days trying to think about these things.  Your ability as a society to foster a good work-life balance is based on having an economic foundation that generates enough income and tax revenue to pay for it.

Which brings me back to Brooks and the Yanks.

The Americans are right now out of balance – and have been for a couple of decades – they have financed their affluence with debt and phantom equity in their houses.   They want more collectively than their collective economic activity can support (health care for all, two year unemployment insurance, defense budget 20 times more than anyone else, etc.).

When this happens at a local or provincial/state level (like New Brunswick), national governments siphon off money from richer places to equilibrate.  When it happens at a national level, you get QE2.

That’s a long way of saying that economic and social goals need to be in balance or tilted towards economic if you want your society to grow and prosper in the long term.

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Most people, even smart folks, put down what is happening in Northern New Brunswick to a kind of natural urbanization – a migration to the big cities where the work is.  They look at Brazil or Kenya and think that is what is going on here.

The truth is that Canada’s rural population has been rising steadily since 1971.   It’s up by well over a million people in that time frame. Sure the urban population has grown considerably faster but it has not been at the expense of rural population decline.    Even New Brunswick’s rural population is up since 1971 – by around 70,000 persons.

In addition, northern New Brunswick has urban populations.   In fact, there are about 70,000 people in Northern New Brunswick living in areas Statistics Canada defines as urban.

I’ve said it before and I’ll say it again.  New Brunswick’s lack of urbanity is primarily due to the fact that its urban centres have not attracted immigrants in any substantial way for decades.   If you look at Ontario, its urban growth is not due to rural decline.  It’s due to urban growth rates outpacing (by a large margin) rural population growth.

Northern New Brunswick’s economic problems are not a demographic issue or a natural migration to the ‘cities’ or any other baloney.  It’s problems – just like NB as a whole – are based on a lack of imagination.  In the 1850s, the Chamber of Commerce in the City of Pittsburgh set up a team whose mandate was to promote Pittsburgh as a place for new investment.  They had a team of folks trying to convince companies to invest there.  Deliberate attempts to foster economic growth -led by both the private and public sectors – has been going on for centuries.

Our approach in Northern New Brunswick has been trying to squeeze blood out of a turnip.   We take an area that has lost its large, anchor companies – while it is shedding investment and people – and hope that by injecting a few public dollars in local firms they will create enough new economic activity to overcome the loss.  Wrong.

For those in the three slightly larger urban areas (Fredericton is only about 20k or so larger than Bathurst – a rounding error in Toronto) who think we are in some kind of inevitable urbanization where notherners move to the south – get ready.  If current trends persist,  after the north has emptied into the south, the south will empty into the rest of Canada.   The folks in Toronto (such as Richard Florida) will say this is an inevitable urbanization – just like those in Moncton say about the Bathurst migration to that city now.

Urbanization is key to New Brunswick’s economic future – I have said this for 20 years.   But it doesn’t have to come by a couple of slightly larger urbans cannibalizating the population of slightly smaller urbans.

Let’s focus on growing NB.   Let’s focus on attracting immigrants and investment.  Let’s allow each region of the province to focus on its strengths and invest in those strengths and then let’s promote this place far and wide.   Sure certain areas will grow faster than others.  Sure, some areas will continue to shed population.   I know of very few examples where all regions within a province or state are growing strongly (Alberta is one example, however).

Let’s have this conversation.  Let’s talk about the reasons why migration happens.  Let’s’ pontificate long and hard about all the social and demographic issues but let’s not confuse some faux urbanization excuse with New Brunswick’s real long term problem – a systemic lack of business investment.

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As you know I have been writing and talking more lately about the need for a new partnership with industry when it comes to economic development. I have written about the challenges associated with this in the past but I continue to strengthen in my view that governments are not particularly good at economic development.

I spent a little time this week with an interesting sector group here in Ontario that seems to have real opportunity for growth and a strong willingness for the industry to take the lead – put its own money on the table – to work on collectively growing the sector including attracting new players into the industry.  The government and economic development agency here would play a support role.

I know this is done in limited ways already but I think there is much more opportunity.    We challenge the industry – whatever that industry looks like – to come up with a viable growth path – and build a business plan covering how to get there.  That plan would have elements that impact government – maybe workforce development, R&D, tax incentives, attracting in firms, etc. but would be not just about government.  Industry leaders would take the lead for the development and others would play a support role.

Critically, the industry would put its own money on the table. I don’t have a problem with government providing funding but I think that when you have skin in the game it changes things.  It brings more clarity and a focus on getting a return on the dollars invested.  When it is just the government’s money, we can be more cavalier.

I realize the inherent flaws in this approach but I am not sure what the alternatives are.

There needs to be a clear business case in order for companies to invest in a jurisdiction.    Because we are not talking about local markets (i.e. the local legal services market), there needs to be a clear value proposition for export-oriented sectors to invest here versus hundreds of other options.  I think that value proposition can be more strongly formed with industry, academia and government in the same room – in a serious, committed relationship.

It does take a change of attitude by all players.  Industry has to move from a me-me-me attitude to an us-us-us attitude and government has to take somewhat of a backseat – a supporting role.

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My column today is on the importance of job creation in New Brunswick.  I mention the slow decline of the call centre industry in the province since about 2005 and I speculate that this decline will continue albeit at a moderate pace.  This is as much about technology and changing customer interaction methods than it is about outsourcing to India (although that is a part of it).  

Then I read that Wyndham is cutting 300 jobs at its SJ call centre and UPS recently announced it would be cutting 200 in Moncton.

As I say in the column this might get worse before it gets better but the folks involved in economic development can’t get discouraged.  We need a new approach – see the column for a few ideas.

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You know capitalism must be working when a media outlet set up to complain day and night about the evils of capitalism is able to turn a $1 million investment into a $315 million sale – a profit that would make Goldman Sachs blush.    I read the Huffington Post a fair amount – mostly from my keyword alerts hitting on stories in the HP but I couldn’t help smiling when I read about this early this morning.  Ariana Huffington is the new CEO of a number of divisions including MapQuest.

I’ve said in a number of blogs that I see real value in media that digs out and reports on corporate malfeasance.   I think the bad apples tarnish the good ones – and they need to be called out.

But old Ariana has been a leading critic of capitalism and greed writ large.  And now she joins the club.

Maybe she will give it all away – like Buffet and Gates.

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