The exogenous shock theory of economic development

In the early 1990s when I first started thinking about economic development I had a chat with a Quebec consultant who was helping the provincial government there develop economic growth strategies.  He was convinced the only way to grow was through ‘exogenous’ shocks which he defined as a big scale, brand new industry where substantial national and international investment flows into a province contrasted with organic growth by trying to encourage local firm expansion.

This was the reason Quebec put the most aggressive tax breaks/R&D support for pharmaceutical development in the 1980s and 1990s and, presumably, why they have the most lucrative incentives for digital media in North America.  I read somewhere that one firm, Ubisoft, has benefited from $200 million worth of incentives.

The natural resources boom in Saskatchewan is an example of this.    Market prices for commodities rise, the province puts in support for the industry and boom – uranium, potash, fracked oil, etc. power Saskatchewan to one of the fastest growing provinces or states in North America (BTW NB has natural gas, potash and uranium deposits).

A massive inflow of people and their investment dollars can be an exogenous shock – think of the amount of flow into British Columbia at the time of the Hong Kong transfer back to China.

Of course, local firms benefit from efforts to attract exogenous investment. Many of Quebec’s most interesting bio/pharma firms are startups that evolved from the 30 year effort to attract pharma investment.

The only big example of this effect in New Brunswick was the contact centre/back office sector.  While we have attracted investment into other sectors, none really rise to the level of making a serious impact on the economy.    Aquaculture was a fast growing sector but it was mostly from within.  Blueberries too although I think the attraction of national and international investment into value added processing is likely going to be key to long term growth in the sector.

I think there is some credence to this theory.   Economies grow by increased investment and trade and the secondary effects that come from that primary growth (e.g. population growth).  Governments should be very focused on how the policy environment can support exogenous growth – although there is considerable debate about the merits of deep incentives/tax breaks as a long term economic development tool.

New Brunswick is trying this approach – at least at a moderate scale – with cybersecurity, cannabis and the Smart Grid.  There have been national and international firms investing in those sectors.   Whether any of them will get to a place where NB is known internationally is yet to be seen.

 

 

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Where are the young entrepreneurs?

We have been debating the curious lack of young entrepreneurs in New Brunswick for years. It’s hard to define the term ‘entrepreneur’ but if you look at self-employment as a proxy – New Brunswick has always had well below self-employment rates among those aged 35 and under.  Across all sectors of the economy there are 36% fewer persons under the age of 35 that identify themselves as self-employed on the Census.

When you look at high value sectors such as IT, engineering, accounting, consulting, etc. the young person self-employment rate across the board is well below average in New Brunswick.

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If you go a little deeper and look at urban centres, the data doesn’t get much better although you have to be even more careful because Statistics Canada reports employment by industry data in increments of five so for sectors with small levels of employment the numbers can be a bit out of whack.  For example, Statistics Canada reports there are no people self-employed in the Moncton CMA in software development in the age cohorts 15-24 and 25 and 34  Technically there could be 2 in the 15-24 age group and 2 in the 25-34 age group – 4 in total – and it would be showing up as zero in the Stats Can data.

With that as a caveat – and an issue facing all urban centres – New Brunswick’s urban centre still have low rates of self-employment among young people (under 35) particularly in strategically important sectors.  The following table compares the combined self-employment in three IT sectors – as a share of total employment in those sectors then compared to the national level.  Moncton and Saint John are at the low end of the spectrum.  Fredericton isn’t listed because it is not showing any under 35 self-employment in these three sectors (again subject to the increment of 5 caveat above).

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There could be problems with the data itself.  It’s hard to believe there are only a very few if any self-employed people in Fredericton under the age of 35 in these three sectors.  I don’t ask people their age but I have met a number in the past couple of years that must be under the age of 35.  But this wouldn’t be a problem in the province-wide data where the number are larger.

But the bottom line remains.  Using this data it would seem there are far fewer young (under 35) tech entrepreneurs in New Brunswick than average despite the fact that almost every city has beautiful facilities with colourful couches and young, smiling faces ready to help you reach your potential – not to mention earnest government officials with their chequebooks at the ready.

As I mentioned above we have been debating this for years.  There are many reasons cited: 1) Some say young NBers are encouraged by parents to ‘get a real job’ because of the historical uncertainty around the economy: 2) Others say we export our entrepreneurs (Dr. Haan’s research shows you are far more likely to own a business if you were born in NB and leave than born in NB and stay); 3)  Some say it has to do with the structure of the economy –  more rural, lower levels of professional employment overall – means less potential for entrepreneurship.; 4) Some even suggest – with some international data to back it up  – that a lack of entrepreneurship is self-perpetuating.  A person with a parent that works for themselves is far more likely to go into entrepreneurship; 5) Some blame a lack of immigration – self-employment rates among immigrants are higher – particularly in ‘tech’ sectors; and 6) Finally, some point to the lack of large industry ‘incubators’ that are traditional sources of entrepreneurs (for example there are DNA links between the former NBTel and something like 50% of the tech. firms in New Brunswick that have reached any kind of scale).

Who knows.  It could be, and likely is, a combination of all these factors and more.

But the bottom line is that we are not seeing the next generation of ambitious entrepreneurs arising in the province.

Just to be clear this is not just about ‘young’ entrepreneurs. Overall rates of self-employment (all age groups) are also lower.  For the IT sector, there are 58% fewer self-employed in Saint John, 67% fewer in Fredericton and 44% fewer overall in New Brunswick when compared to the country as a whole.

Instead of spending all our time studying the ecosystem itself – sources of funding, incubators, cluster effects, etc. I think we should spend a little more time on the front end – where do entrepreneurs come from?  And what role, if any, should governments, educational institutions, the research community, etc. have to influence this pipeline?

We need to see more high value IP-based startups coming out of our universities (Dr. Shukla is working on this in Fredericton as one example).  We should see if our large industrial players have any potential to foster high value startups in their supply chains (Dave Grebenc, et. al. working on this) and we need to see if there are high value entrepreneurial opportunities that could emerge as the result of New Brunswick being a really good place for certain growth industries (cybersecurity, smart grid, etc.).

Maybe we need to attract a lot more entrepreneurs to our shores.  I know that will sound like heresy to some but if we are exporting entrepreneurs – like Haan surmises – maybe we should start thinking about importing a few.  Then the question becomes why would they want to come here?  Now we are starting to have a real conversation about economic development.

 

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Turning the big 5-0

This week I turned 50.

Reading those condescending  LinkedIn posts about the young HR managers taking a ‘chance’ on the 50+ workers now takes on special meaning.  One I read today talked about his great success hiring 50+ workers because they “bring their own lunch” and won’t switch firms for a “two dollar/hour raise”.

IMO people should be just hitting their career stride by 50.  I have had an interesting journey that involved a job where I was part of a team that attracting 30+ multinational firms to New Brunswick; I helped a young startup company increase its sales by 8x and its staff by 4x over a six year period; I started a successful consulting firm with clients in six Canadian provinces and two U.S. states; and I completed a 2+ year stint as Chief Economist with GNB.   On the side I have been writing a column with the Telegraph-Journal for over a decade (excluding the GNB stint); was a research fellow at the Donald J. Savoie Institute and got to collaborate with the Conference Board of Canada on multiple occasions.  I also have written articles/commentary for seven magazines and was a contributing author for three books.

I was born in December 1967 – the year of Canada’s Centennial which I suspect was a little less tense than the 150 seems to have been.  Lester Pearson asked all Canadians to have a centennial project – plant a tree, etc. My parents had me.   I was a gift to Canada.  To all my Twitter trolls out there – there are no refunds.

And just to confirm David Dingwall’s “I’m entitled to my entitlements” ethos was alive and well in Canada 50 years ago, my mother’s doctor suggested he would induce birth (I was due in early January) if she wanted so they could get whatever child tax credit that was available back then.

Almost 15 years ago a trusted friend told me if I wanted to ‘make it big’ I would have to speak to a national audience.  New Brunswick was too small.  I started writing briefly for the Globe & Mail’s Economy Lab (online) but after a year or so I gave it up.  I had several good job offers in Ontario.  I have resisted because I like it here and I like my little niche fighting the battle for hearts and minds here.

While I now generate more consulting revenue outside New Brunswick, my goal is still to try and positively influence change right here in the little old picture province (or drive thru province?).

Have I had any influence on New Brunswick’s economy and economic development policy?   It’s hard to say. I fought and lost the fracking battle.  I was on the wrong side of a number of big policy battles over the past 20 years.  I have played a small role, I think, in a greater focus on accountability and measurement in government economic development activities.  Although I worry now that some – particularly municipal – governments are putting too much focus on metrics – particularly those metrics that are out of the control of economic development organizations.

I plan on spending the next 25-30 years continuing to fight for a New Brunswick that is more globally connected, attracting more international investment, entrepreneurs and people and for a New Brunswick that is more self-confident.  And for a New Brunswick that is safely and sustainably developing its natural resources.

I believe we are at a fundamental crossroads in this province.   We have never in our history been in this place before and it will take a lot of effort to emerge as a growing and dynamic economy.  We have to treat people attraction the way we used to treat company attraction.   We need to be one of the best places in North America to migrate to.  If we can get there that will be a huge benefit as we move forward as a province.

So you can expect a continued stream of content on these pages.   I have written 3,500+ blogs over a 14+ year span.   That is a staggering amount of content.  Combine that with over 500 columns, articles and book chapters – not to mention hundreds of reports for clients – and that is a heck of a lot of content.

As a means of generating household income, it helped my wife and I raise three pretty interesting and well-rounded kids.  That in itself makes me grateful.

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Attracting international R&D: In praise of Siemens

One of the issues we discuss very little in New Brunswick is the role of multinational firms.  When we do, many people derisively talk about how we need to ‘take care’ of our own firms and they express skepticism about why international firms would want to set up in New Brunswick unless they get massive corporate welfare.

One famous NB CEO, who shall remain unnamed but you will likely figure it out, a few years ago after winning his 99th award for business excellence got up and said something like “We don’t need any outside companies coming here and saving our bacon” and then decried provincial government efforts to attract firms. I winced – this is exactly the kind of crap that holds us back.  Of course, the great irony of this story is that this same CEO is now buying up firms around the world and, one assumes, making the case that foreign investment from his firm will be very beneficial to those jurisdictions.

This is among the most frustrating issues for me as it points to our collective self-confidence problem.  The question is not why would these firms want to locate in New Brunswick it should be why wouldn’t they want to locate in our province?

But our collective self-confidence problem aside, I was looking at some interesting data this morning that points to another important role for multinational firms in Canada – as drivers of R&D.

Statistics Canada looks the amount of total in-house research and development expenditures by firms in Canada by ‘country of control’ – either Canada or foreign.

In Ontario, Canadian controlled firms spent $5.1 billion on in-house R&D while foreign controlled firms spent another $3.4 billion.  In Quebec, Canadian controlled firms spent $3.4 billion on in-house R&D while foreign controlled firms spent another $2.0 billion.

In New Brunswick?  You know the answer before I tell you.  $89 million spent by Canadian-controlled firms and only $11 million by foreign-controlled firms.  And, I suspect that one firm, Siemens accounts for a good share of foreign-controlled firm R&D in New Brunswick.

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Siemens has something like 50 staff and a major global R&D centre in Fredericton.

Despite our phobia of international firms, I think we should study the Siemens example and figure out if there are other opportunities to attract global R&D investment to our province.  Can we boost cannabis R&D here?  How about international forest products R&D?  How about international cybersecurity R&D?

We are pretty good at attracting contact centres and back offices and even the occasional IT firm.  Maybe we should sharpen our pencils and see if there is any potential to attract international R&D here.  Compared to the rest of Canada we are really missing the boat on this.

 

 

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NB’s R&D sector – no old fogies allowed?

As I have detailed elsewhere New Brunswick is primarily known for having  an older workforce when compared to other provinces.  Not so with the R&D sector where 44% are under the age of 35 – second only to PEI among the provinces and much older the country’s R&D industry as a whole.  This could be caused by a number of things such as older researchers are more likely to leave the province or the industry is growing and hiring younger talent.

The NB R&D sector did expand its employment from 435 in 2006 to 555 in 2016.  At the same time employment nationally declined by 6% so maybe this is the main reason.

The bottom line is that there are a lot of young, bright millennials in short pants running around the R&D sector.  Eric Cook, the boss over at RPC better brush up on Chance the Rapper and Snapchat.

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New Brunswick’s youngest and oldest occupations

The Census gives us good information on the age of workers in the province.  While it doesn’t provide a median or average age by occupation it does breakdown the number of people working in 500 occupations (and aggregations) by age cohort.  Using this data we can suggest which occupations are the youngest and which are the oldest.

Of course the entire labour market is aging so I am more interested in the difference between New Brunswick and Canada. Which occupational groups are either much younger or older than the national level?

New Brunswick’s 10 oldest occupations are listed below (those with a minimum of 1,000 workers).  The oldest by far is NOC 7611 construction trades helpers and labourers where there are 65% more workers over the age of 55 when compared to the national labour market (almost 30 percent in total).  Nearly half of all security guards are over the age of 55.   Of particular interest, 43% of all home support workers are over the age of 55 – 2000 of them in total – just as we are about to hit a wave of need.  Who’s going to be there to change your bedpan?

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Of the 500 4-Digit NOC occupations, New Brunswick is younger – by this measure – in less than 10.  56% of early childhood educators are under the age of 35 – 41% more than the share in the national labour market. Interestingly insurance and financial sales occupations is very young occupational group (although the astute among you will note this is a 3-digit NOC but because the rest will not we won’t dig any deeper).   The IT industry tends to be a very young industry – compared to the national labour force there are 14% more young people in technical IT occupations.

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Maybe it’s time remove the opaqueness of tax policy. Does it offend Canadian sensibilities?

I just read John Geddes masterful piece in Macleans on the history and influences of Bill Morneau’s tax crusade against the 1%.   It reads like a condensed modern biography – a thriller with Geddes unearthing deep background – only partially but tantalizingly relevant to the story itself.   A Reform-er once told me back in the 1990s that Ottawa was the most socialist city in North America and it was the job of politicians to restraint their impulses.  Michael Wolfson comes across as that guy – the dope smoking, draft dodging American, brilliant, worked his way up the ladder at Statistics Canada, left and kept on fightin’.

Read the bit about how Wolfson dismisses entrepreneurial risk.  This, in a nutshell, is one of the ideological parameters of the debate.  Are entrepreneurs the engine of the economy and entrepreneurial risk something to be encouraged or are they NEPmen that need to be restrained and controlled by the state?  Of course, like any issue there are folks on the far left of that continuum and those on the far right and Canada kind of comes in somewhere…. You decide.

No matter how this current tax debate unfolds, I think full transparency in the tax system is what we need.  Canadians maybe don’t like thinking that things are happening behind their backs.  Maybe if this corporate structure at the centre of this debate was set up specifically as a vehicle to encourage entrepreneurial risk – and openly so – the debate would be different.  But when you have politicians – PMs and Finance Ministers – saying this is just a way for a few hundred thousand ultrarich to dodge paying their fair share of taxes – it gets really tricky.   I get a lot of emails from some very bright folks who are confused on this – is Morneau going after the family farm or the ultrarich plutocrat using a shell company to dodge taxes?

A few years ago I tried to calculate what my net tax rate was.  I set up a spreadsheet and plugged in income tax (fed/prov), property tax, gas tax, HST, etc. and I worked in the deductions, any credits I had, etc.  It was a big job and I am not sure I properly framed it but in the end I got to an effective overall tax rate of about 50%.

At the same time I read a book on the flat tax – going around the U.S. at that time with some interest- and what quite intrigued.  In one iteration of that you have one tax – say a consumption tax – and that is high enough to raise all the revenue government needs.  It’s clean, net and easy to administer.  And, unlike the detractors suggest, you can ensure that it has a graduated effect by rebating taxes paid based on your income.

Anyway I did a little back of the napkin calculation and – without any kind of deep analysis – I think if we used the consumption tax – HST – as the vehicle the rate would have to be something like 35-40%.  Talk about a tax revolt.

Now, in fairness, there is some truth to the idea that certain taxes are supposed to go to certain public services.  Your property taxes cover the cost of local public services – garbage removal, police, fire, etc.  Your federal taxes cover national defense, international relations and programs to smooth out the quality of public services across the country.  The gas tax – at least theoretically – is used to raise funds to pay for roads and upgrades – and now to change behaviour related to carbon emissions.

In the end, though, I think we should work harder to be transparent with the tax system.  I know that accountants won’t like this because in part they get paid to tinker around with the byzantine system to ensure minimal taxes paid.  But even if you keep the byzantine system with the myriad of deductions, and structures, and household vs. personal, and tax breaks for ballet slippers, etc. at least make an attempt to explain it to people.

 

 

 

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Immigrants and the workforce: Moncton CMA impressive results

One of the mantras I have been preaching for years now is the need to attract immigrants into actual employment opportunities.  I realize this is not as simple as it seems given the sometimes strange world of immigration where prospective immigrants with lots of points can get in and ones that have the skills for certain jobs cannot.

The good news is that despite the fairly significant increase in immigration to the Moncton CMA, a high level of these immigrants are participating in the labour market.  The table shows the labour market participation rate for urban centres with at least an immigrant population of 5,000.  Among all urban centres east of Winnipeg, Moncton ranks 2nd for immigrant labour market participation.  Obviously we have to be careful with this data as we have no way of knowing how many of the Syrian refugees are showing up in these numbers (not likely many given the timing of the Census).   Also, in certain areas, the immigrant population might be older and there are more retirees in the mix.

But for the most part this is a good news story for Moncton.  The more alignment between the inward migrants and actual labour market participation the better.

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Net worth-less? What’s going on?

Well the new data on household net worth is likely to cause a kerfuffle. Statistics Canada is reporting that median household net worth in New Brunswick dropped by 11% between 2012 and 2016.  If you look at the average household net worth the story is different but the issue remains, what gives?   Normally, when one province tanks in the data Statistics Canada will have a little more insight in their narrative but nothing here.

Maybe we will see more in the newspaper reports on this but my quick analysis shows something strange.  On the household asset side, we have seen steep declines in the value of RRSP holdings, deposits – a collapse in mutual fund/income trust assets and TFSA savings – substantial variations from Canada since 2012.

What happened?  Did all of a sudden NB financial planners become horrible at their jobs?  A 37% decline in RRSP assets in five years?  a 68% decline in mutual funds/income trust assets in five years?  Sure, they could be moving around some of the income – we saw a big increase in EPP value (for the group of people lucky enough to have one).  I would be curious to have an investment professional weigh in here.  We do have the data by income quintile but the figures for the higher income quintiles are not published for New Brunswick.  We heard after the government raised the tax rate on high income earners that high net worth folks were trying to shift income to avoid the tax – maybe leave more of it in the business, etc. (leading to the Morneau crusade?). Something’s fishy.  It’s hard to believe that in just five years you would see such big variances to the rest of Canada.

On the debt side I can’t quite figure out Statistics Canada’s data.  Only a 5% increase on the median value of mortgages on principle residence, a modest increase in credit card debt (from a low base), a decline in median line of credit debt, a decline in student loan debt, a modest increase in vehicle loan debt and declines in other debt – and still Statistics Canada is reporting an overall 26% increase in total debt. I guess my math skills are a bit sketchy these days.

The following chart shows the top line numbers.  Remember these figures are for those that actually hold the asset or debt – not everyone.

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SJ largest IT sector, Freddy largest IT labour pool, Moncton doing fine

Okay,  I posted earlier this evening that Saint John has the largest IT sector measured by the number of people working in the IT sector as a share of total employment.  It was pointed out to me that lots of IT folks work in non-IT sectors, which is true and I have written about this in the past.  When you look at people working in IT occupations (regardless of sector), Fredericton has the highest concentration of IT workers in Atlantic Canada and the urban centre ranks 5th in Canada by this measure.  There are lots of IT folks working in government, for example.  Moncton improves in its ranking because it has fairly large IT shops within its big employers such as Medavie Blue Cross.  Saint John has some of this IT employment within non-IT sectors but not as much as Moncton or Freddy.

So, we can say with certainty that in New Brunswick Saint John has the largest IT sector by employment, Fredericton has the largest IT workforce and Moncton has a strong IT workforce with over 1,700 employed in IT occupations giving it a higher concentration of IT workers than most other urban centres in Canada ahead of places such as Guelph, London and Kingston.

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