The Pictou/Michelin $25 million economic development paradox
Michelin is reducing its workforce in Pictou county by 500. As a compensation, the firm is setting up a $2 million fund to support those – former employees or others – that want to start their own small business. They will offer loans up to $100,000 and business support from the firm. The repayments of the loans will be turned back into the fund and be re-lent out to other small businesses in need.
At first glance this sounds like a really neat thing to do.
Michelin is taking 500 jobs out of the local economy – and probably many more through a reduced supply chain. If those jobs pay $50k that means a reduction in income of $25 million in the county – not including indirect and induced effects which would push that number much higher.
What does a $25 million decline in income do to the local economy?
Using average household spending data for Nova Scotia, we can estimate the effect.
It reduces current consumption by some $19 million. It reduces spending on food by $2.7 million (including a loss of $725,000 in restaurant sales). It reduces local property taxes by $500,000. It reduces spending in those DYI home improvement stores by $150,000. It reduces spending on household furniture and equipment by $675,000. It reduces the local market demand for vehicle maintenance and support by nearly $500,000. It reduces the local market demand for eye-care and dental services by nearly $200,000.
Now, of course, this isn’t real. There will be more EI payments in the short term. People will dip into their savings to continue personal spending, etc.
But the illustration makes the point. You had $25 million – and more – coming into Pictou from outside – inflating the size of the local market for goods and services. That goes away and our response is to go out and encourage more small businesses – 97% of which rely on that local market for goods and services. If you deflate the restaurant market by $725,000 and encourage five new restaurants to start up what is the net effect?
What Pictou really needs is a replacement for the $25 million.
So, would a better alternative be to invest in efforts that lead to another large scale exporter? How about an incubator for export-oriented start-ups?
I don’t actually know the answer but I do know that if you are a small business in Pictou county you now have another source of capital – along with PNS, ACOA, CBDC, BDC, and others depending on what sector you fall in. Maybe there was a gap that Michelin can fill. Maybe Michelin will do it better – the article states that in other communities this program has supported 84 businesses and lent more than $7.5 million which has created approximately 1,300 jobs. If the bulk of those jobs are export-based, that would likely replace the lost Michelin income for Pictou county.
But I hearken back to a meeting I attended in the Miramichi after the closure of UPM. The new strategy, I was told, was the community was going to focus on tourism and small business. I warned them of this exact problem and challenged them to think about how to truly replace the $50 million in lost income and local demand. Of course the Miramichi has mostly replaced this demand now – through its 2,000 migrant workers to Alberta who send their paycheques back to the community (although supply chain benefits are gone).
Unfortunately, we tend to lack basic knowledge about how economies grow and that translates into suspect policies and programs.
I’d like to see stakeholders in Pictou sit down and have an honest discussion about how they could really replace $25 million in lost income and local demand. It may involve targeted small business funding but my suspicion is the community needs a broader view.