Is the belief that cities are driving economic growth killing investment in Canada’s natural resource extraction sectors?
Exports of natural resources have long been seen as Canada’s comparative advantage in global trade and a reason for our high incomes. But lately Canadians see natural resources industries as limiting the evolution of our economy and society.
As environmental concerns continue to grow and as beliefs that resource abundance is a curse that harms dynamic sectors like manufacturing, policy makers in Canada have shown little concern for the deteriorating competitiveness of resource producers. Politicians have shrugged and said the decline of resource industries is due to “market forces”.
While natural resource industries drive gross domestic product growth, many believe that the income gains from resource exploitation fall short of the social and environmental costs. Resource-producing economies have higher income inequality, which is interpreted as evidence that the gains are not shared across the population, or they are earned at the expense of third parties. In an effort to overcome the rigid utilitarianism of regulatory decisions which used the overall “net benefit” of a project with less emphasis paid on the distribution of the benefits and costs, governments promoted “social licence” requirements for resource projects while undermining the social acceptance of our regulatory agencies like the National Energy Board. The result has been that we have effectively killed off investment in resource projects like the Energy East pipeline and shale gas development in New Brunswick.
Many see the growth of the Canadian economy over the past 30 years as driven by the economies of large cities. Massive public support has gone toward sustaining manufacturing of autos, the aerospace sector, superclusters for artificial intelligence and infrastructure for things like public transportation in the big cities. Many Canadians believe the important and modern economies are knowledge-based economies, not resource producing economies. In short, hewers of wood are not sexy in Davos.
In our zeal to transition away from traditional resource dependence we have allowed a narrative about the reasons for Canada’s success to develop unchallenged. The narrative of cities as a driver of growth, and resources as a drag on growth, ignore that there is an alternative interpretation of what has caused these outcomes.
What if the growth of cities has been driven by their capture and concentration of wealth from the resource producing hinterland? Over the past 15 years, investment in resource-based activities, particularly mining and energy, has been the driver of investment for the country. Falling transportation costs and technical change in resource extraction has reduced the imperative to locate services, forward processing, and hence population, in resource-producing areas. Instead, we “book” the GDP from those activities in the cities.
But what if the resource sector is the dynamic sector with respect to technical progress? While much of the Canadian-city-focused growth narrative has portrayed natural resources as devoid of innovation, the reality is that the resource-based industries have measures of innovation activity, including patenting, that exceeds most other sectors of the economy and over the long run has matched the performance of manufacturing. Our ability to finance diversification of the economy into sectors like IT/ICT has come from the resource wealth we have generated.
The next decade will teach us a lot about what drives the Canadian standard of living because bad policy has lasting effects. If I am wrong, we will learn that the big cities are capable of growing our national income independent of our natural resource exports. We should see a continued period of strong economic growth fueled by our population continuing to redistribute itself to the large cities. However, if I am right, then we should see that loss of investment in energy projects and infrastructure like pipelines as the reason for stagnant GDP growth and an economic malaise just like in the 1980s and early 1990s.
For what it’s worth, I hope I am wrong.