Remarks to the Sunrise Rotary Club of Edmonton Friday 10 February 2017

 

Background  Bruce Clark asked me to provide a perspective on the debate occurring in policy-making circles: how to encourage economic diversification in Alberta.  Before getting into the meat of the issues, a disclaimer.  I worked in the Treasury Department from 1986-1996. Treasury folks tend to want to cut spending (or raise taxes) – balance budgets or produce surpluses- but are never keen to use incentives.  Rather let private sector folks do what they are supposed to do best- compete, invest and create jobs.

My employment period spanned two ministers- the late Dick Johnston and Jim Dinning.  Johnston’s tenure could be charitably called “bailing water” and Dinning’s “righting the ship.”

As with today’s generation of politicians, Getty and Johnston sought to find ways to jump start the moribund Alberta economy during a period when both oil and natural gas prices had sagged to historic lows (real terms).  An economy that was used to $40 (then) or $100 per barrel oil prices (more recently), and whose labour markets and government were sized accordingly, had to face a drying up of capital investment and a brutal downsizing in industry, real estate and government sectors.  The blessing and curse of a commodity based economy

So today, I will keep my remarks concise and then look forward to engaging you in a conversation.  Here is how I’ve carved up the topic.  What is diversification?  Should we be worried about our current situation; a brief history of earlier diversification efforts and then I’ll examine obstacles and prospects

Understanding Diversification There are several ways to understand diversification.

One way is to look at what products the economy sell. If we sell a wide range of products from electronics, drugs, food products, paper products, cars, business services this suggests a more resilient economy.  That is- if one sector goes down, other products  will cushion losses in one affected sector.

One facet of product diversification is the complexity of the product being sold.  If a product, like grain for example, which is easily reproducible- then such production can be easily undermined by producers in other parts of the world. But an Iphone, which is a very complex product, is less easily reproduced.

Another perspective is the diversification of export markets.  An economy that has only one dominant buyer- the United States for example, exists in a more perilous situation if economic and political interests in that jurisdiction join together to attack exports entering into their home market. Softwood lumber and crude oil are classic examples of what economists call monopsonistic behaviour – a monopoly of buyers.

Another lens to view diversification is through the labour market. To the extent that our economy has a diversity of occupations this suggests a greater resilience to disruptions to an economy. For instance- a balance of engineers, computer coders, artists, architects, fashion designers, medical, educational, logistics planners, construction workers, business consultants, government and agricultural workers would point to an economy less vulnerable to rapid changes in product demands.

Finally the diversity of capital employed in the economy (public and private) – refineries, roads, factories, public parks and museums, coal plants is another measure of whether an economy is placing heavy bets on the success of a particular economic activity.

Some History My thesis is that the policy decisions taken by the triumvirate of Anne McLellan, Eric Newell and Ralph Klein to spur energy investment in the oil sands seriously distorted the economic development in the province. You do not need to be a tree hugger to acknowledge that serious distortions occurred in the Alberta economy- especially in labour markets and capital investment.  These distortions during the 2003-2009 caused an investment boom last seen in Alberta in the late 70s and early 1980s. The boom was inevitably succeeded by bust.  Not only did the oilsands royalty policy distort investment decisions by making uneconomic projects look economic, it fostered a “wild west” race to complete projects.  This rush in turn left project sponsors hostage to sub-contractors, suppliers, and labour.  The provincial government was also sidelined as it competed for the same resources to build infrastructure and pay public sector workers.

At the same time, the provincial treasury was filling with money from the sales of leases, temporarily high natural gas prices, and the capital investment boom that found its ways in construction workers pockets, construction firms and oil industry and ancillary industries.

The chart shows non-renewable resource revenue as a percentage of government own source revenue- that is provincial revenue from all sources excluding federal transfers-  since 1981. As you can see the wide variation from nearly 50 % to below 20%. In 2016 resource revenue was below ten per cent.  This volatility is a big problem for the government and residents of the province.

image027Peter Lougheed instituted a number of measures designed to diversify Alberta’s economy. PWA was purchased and its head office moved to Calgary. A stock savings program was also created to incent Albertans to invest in companies principally operating in Alberta. Vencap Equities was set up with a large pool of capital. Other initiatives are also listed here, including community bonds used in rural communities. Generally speaking these did create meaningful employment

But a number not listed not diversification projects per se but preservation initiatives. While the magnesium plant was a diversification effort without sufficient attention due to its technological feasibility, those listed here really tarnished the Getty legacy (and Lougheed’s too).  Huge bail-outs and subsequent write-downs were taken with the credit union bailout, Principal Group collapse, Gainers, Novatel (although the privatization of TELUS was generally seen as a success).  Another problematic investment was the Bi-provincial upgrader sold under Klein that has been a good long –term investment for Husky and the Saskatchewan government.  The sale to Onex of the Vencap portfolio remains a disaster in the mind of Vencap’s former management.

Obstacles  Alberta is a province of builders who seem prepared to take risks.  But the fiscal history of the province has shown that most builders- especially on the grandest scale-  look to various governments to underwrite their risks.

Alberta’s financial industry is highly specialized and is geared to oil and gas because that is where the BIG MONEY IS. Our oilsands industry has been underwritten by the taxpayers- the construction and engineering sectors have grown strong on provincial contracts. Our universities and polytechnics more than ever support our energy industry. Recent incentives to encourage petrochemical plants reinforce the notion that private industry has to be lured to set up in the province.

Prospects With a change in government it would seem a good time rethink our approach to economic development and to government.  Alberta’s prospects are actually really good.  We have a young well-educated population. Alberta is a tolerant, welcoming society.

Fossil fuels will remain an important transportation fuel for several more decades, but oilsands extraction is a sunset industry. Few politicians will tell you that and the business media is there to ensure that stranded assets are paid for by governments. We can and should be making money by reclaiming our orphan wells and the tailings ponds.  Alberta is not the only spot in the world with these engineering challenges. So we can lean to favour new technologies while profiting from cleaning up the past. And energy companies can also become renewable energy companies if leaders in Suncor, Canadian Utilities and other major Alberta corporations shift their views from quarterly results and look to their children and grandchildrens’ futures.

The future economy will be dominated by countries that invest heavily in human and machine intelligence.

The emergence of artificial intelligence, robotics and 3-D printing and its implications from food production to driverless cars to computer generated graphics in the entertainment business means that more and more physical jobs will continue to be displaced.  An excellent example is the work of Professor Sutton at UofA who is collaborating with Royal Bank to develop Artificial intelligence.

The new wealth is in the form of intellectual property that has been appropriated by a few enormously wealthy corporations for their benefit. Money is in designs and creativity not muscle (except for sports warriors!).

Finally there is a great deal of physical capital that sits idle.  Thoughtful business leaders Uber and Airbnb recognize that sharing places or things is a sound business strategy.  Why can’t Alberta be leaders in this area

Here’s my website address- I encourage you to take a look. Thank you for your attention and  I welcome your questions.

 

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