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Future is bright for B.C. and Canadian economiesMonday, July 10, 2017 > 09:56:28
“Hewers of wood and drawers of water” is the well-known summary of our economic origins and early economic history. We did rely heavily on the exploitation of our diversified, natural-resource endowments. Because of the abundance, quality and diversity of these gifts of nature we were able to prosper, whether from our wildlife, fisheries, forests, rivers and lakes, farms or mineral deposits. We earned significant “economic rents” from these resources (i.e. excess returns from the costs of exploiting them).
Canada then, as now, sought to broaden its economy, especially into manufacturing. The National Policy of 1879 imposed high tariffs on manufactured imports to protect our nascent manufacturing sectors. Ironically, these efforts attracted foreign manufacturers to set up in Canada to avoid these tariff walls, and to the present day our key manufacturing firms in automobiles, consumer products and much of our food sector are dominated by foreign firms.
The past was also typified by innovative government efforts to provide needed transportation, communication and energy infrastructure to span our vast country. Air Canada, the Canadian National Railway, B.C.’s Pacific Great Eastern Railway (later B.C. Rail), Ontario, B.C. and Quebec Hydros, Alberta General Telephone and Manitoba Telephone, and municipal enterprises like Edmonton Telephone Corp. (now part of Telus) and Edmonton Power (now EPCO) are all examples of the creative use of Crown corporations providing necessary infrastructure across our thinly populated and sprawling geography.
Economic rents from our resource base diminished considerably by the 1980s. The largest, most-accessible forests and mines had already been developed, the fisheries on both coasts were overfished and went into decline, and both now encounter heightened global competition or trade barriers like the countervailing and anti-dumping duties recently levied by the U.S. government on Canadian softwood imports. Large economic rents were being replaced by rent-seeking behaviours — for example, lobbying by special-interest groups for taxing, spending or regulatory measures that confer some financial benefit — seeking to protect jobs, especially in fishing and forestry. Agricultural marketing boards similarly sought to protect eggs, poultry and dairy production. The results have been problematic and largely hurt the resource sector by protecting it from competition and shielding it from having to be more innovative and globally competitive. Rent-seeking goes well beyond resources, of course, and is evidenced in the Bank Act, where no shareholder can own more than 9.9 per cent of a major Canadian bank, and in broadcasting and transportation, where many foreign-ownership limits also lead to inefficiencies.
Canada thrived on resource rents and to a lesser extent on rent-seeking in diverse sectors. Where we have fallen down badly is in the misunderstood but vital area of “value-added” and its concomitant, product and service innovation. Value-added starts with the customer, not the producer or the labour used to produce. The basic idea is to add value to customers and by doing so be able to charge higher prices and, yes, earn economic rents again. Gucci or Prada would be examples of firms adding value to customers through the prestige of their brands and thus charging higher prices than would be possible otherwise, in the process earning those economic rents. To capture these rents thus requires adding value through product or service design and delivery. Banning raw-log exports so that we can capture manufacturing jobs and rents in B.C. is rent-seeking not rent-creating. Developing new manufactured wood products would be a counter-example, where we are indeed starting to excel as evidenced by the world’s tallest wood building, an 18-storey student residence at the University of B.C.
Declining resource rents aren’t just negative: they spurred such industries as consulting engineers, lawyers, financiers and accountants, who specialized in Canadian mining ventures. As Canadian mining slowed, these professionals took their skills global, where they continue to prosper, building on their original expertise.
The rise of the so-called Pacific Century two decades ago has presented Canada and B.C. with huge tests given their heavy reliance on trade with the U.S. Canada continues to be overly reliant on U.S. trade, with 76.3 per cent of our merchandise exports bound for the U.S. in 2016 and only 10.5 per cent going to the Asia Pacific. B.C. has responded much more nimbly, offering a useful exemplar for the rest of Canada. In 2016, the U.S. accounted for 54.3 per cent of B.C. exports (up from a low of 42.9 per cent in 2011), while Asia Pacific accounted for 35.4 per cent (down from highs of 42.9 per cent in both 2011 and 2013).
The future for both Canada and B.C. is bright. Canada needs to embrace the Asia Pacific much more energetically, following B.C.’s lead. Across the country we need to move quickly from rent-seeking to rent-creation. For example, those raw-log auctions are a wonderful test of our ability to add value to customers. When we create higher-valued wood products we will be able to outbid foreign firms, so these and similar open-market mechanisms provide great bellwethers of our ability to add value and create rents in the process.
We do face many challenges, including getting rid of myths that we can’t compete, weaning ourselves off the U.S., going global and building that value-adding, rent-creating culture. I’m confident that the last two are well underway. The first is the most difficult to overcome as our myths of economic inadequacy are well-entrenched and broadly believed in spite of our numerous global successes.
We are world leaders in building and sustaining among the world’s most livable cities, where the knowledge workers of the future will live and provide the skills we need to compete effectively. Mercer’s 2017 Livability Rankings of 23 Cities, included four Canadian ones: Vancouver (fifth); Toronto (16th); Ottawa (18th); Montreal (23rd). The Economist 2016 Livable Cities Ranking placed Vancouver, Toronto and Calgary third, fourth and fifth, respectively. Meanwhile, Mercer’s 2017 Cost of Living Rankings among 209 cities included only Vancouver (107th), Toronto (119th), Montreal (129th) and Ottawa (150th), illustrating just how cost-competitive our cities are, along with their superb livability.
Reinforcing our position as a highly desirable country in which to live and work, the US News and World Report 2017 Best Country Ranking ranked Canada No. 2, and the World Happiness Report 2017 ranked us No. 7.
Our universities also punch well above their weight globally. The Times Higher Education 2017 World University Rankings had three Canadian universities in the top 50: University of Toronto (22), UBC (36), and McGill (42), which the QS World University rankings reinforced, with McGill, U of T and UBC at 30, 32 and 45, respectively. Meanwhile, our often-maligned Air Canada for six years in a row is voted the best airline in North America, and YVR for eight years in a row is Best Airport in North America.
Canada, and B.C., have been challenged, though, in the current knowledge-based and technological economy. Canada ranks a mere 24th in patents per capita and 10th in R&D spending. In a recent country ranking of startups, we ranked 7th in the number of startup companies with 647, vastly behind No. 1 U.S. with 24,016 startups.
In sum, Canada has succeeded in the past 150 years in making the difficult transition from an overwhelmingly resource rent economy to a modern, highly diverse economy, which includes resources and development of the technology to bring them to global markets. I’m hugely optimistic about our prospects for the future given our successes in the past.
Michael Goldberg is professor and dean emeritus at UBC’s Sauder School of Business, specializing in urban economic issues.