The resource sector doesn't deserve the bad rap from some economists who have long disparaged it as an economic curse that stifles overall growth. On the contrary, growth in resources and other sectors can reinforce each other, writes Philip Cross.

 

OTTAWA, May 8, 2013 – A myth-busting Macdonald-Laurier Institute study released today puts to rest the image of natural resources in Canada as an economic curse that has stifled overall growth by weakening institutions, distorting the economy and depressing investment in physical and human capital.

"Natural resources in Canada do not deserve their poor image as a source of economic growth," writes Philip Cross, MLI research co-ordinator and former chief economic analyst at Statistics Canada.

"On the contrary, over the long term, incomes in Canada have benefited from higher terms of trade driven by commodities."

Mr. Cross said extracting wealth from natural resources has been pivotal to long-term growth in Canada, which has the largest resource sector among the G7 nations.

"However, rather than taking pride in the uniqueness and diversity of their industrial base, some economists have long tended to disparage natural resources as a source of income growth," he said.

"In Canada, the staples thesis—that a dominant export drives growth—quickly evolved into the notion of a staples trap—that growth based on natural resources lowers our terms of trade, stifles innovation, and increases our susceptibility to demand shocks that could wipe out large investments overnight."

However, the idea of a "resource curse" evaporates under closer scrutiny. As Mr. Cross points out:

 

  • Growth in resources and other sectors can reinforce each other. Canada's ability to process resources efficiently has led to a growing share of raw materials in our imports, boosting those manufacturers who refine them. In 2012, natural resources accounted for 27.8 percent of all imports after hovering around 20 percent from 1988 to 2003. The increase was concentrated in energy products and precious metals.
  • Too often, natural resources have been presented as an adversary of other industries. In the 1990s, the boom in manufacturing, culminating in the ICT bubble, accompanied steady losses in natural resources. While resources boomed from 2002 to 2008, manufacturing struggled. The recovery of manufacturing since 2009 and the ongoing boom in resources shows that both can prosper simultaneously.
  • The resource sector has been at the forefront of innovation, creating whole new industries from the oil sands to shale gas, while keeping costs down. Output in resources is less cyclical than in manufacturing or construction.
  • The resource boom has contributed to narrowing regional differences in unemployment, while higher incomes helped reverse the long-term loss of population in Saskatchewan and Newfoundland and Labrador.

Data for annual gross domestic product in the resource sector show fewer and less severe declines than do manufacturing or construction, even during recessions, Mr. Cross said.

Overall, annual output in natural resources fell in five years between 1981 and 2012, compared with eight declines in construction and nine in manufacturing. The average drop in the three recessions (1982, 1991-1992, and 2009) was 13.3 percent in construction, 12 percent in manufacturing—and just 3 percent in natural resources.

Mr. Cross also disputes that natural resources are the leading source of regional inequality. Canada's manufacturing heartland of Ontario and Quebec accounts for 72.3 percent of manufacturing GDP, while western Canada produces 23.7 percent of manufacturing output. These shares are almost the mirror image of energy production, as western Canada produces 70.5 percent of energy and central Canada 21.2 percent.

"From this perspective, manufacturing also contributes substantially to inequality across regions," Mr. Cross said.

In addition, the resource boom clearly has been beneficial to some provinces, in particular Newfoundland and Saskatchewan, where economic growth has traditionally lagged, Mr. Cross said. After years of below-average incomes, the GDP per capita of both provinces soared to near Alberta's level.

According to MLI Managing Director Brian Lee Crowley, "Philip Cross's myth busting about the extremely valuable role natural resources play in Canada's economic performance is the perfect antidote to those voices who mistakenly claim that a strong resource sector somehow equates to an underdeveloped or primitive economy. On the contrary, natural resources have created enormous wealth for Canada, stimulated innovation, helped to ease regional disparities and reduced the damage that recessions might otherwise cause. The story of natural resources is a great one for Canada and we should celebrate the sector rather than feel chagrined by its strength."

Philip Cross is research co-ordinator of the Macdonald-Laurier Institute (MLI), an independent non-partisan public policy think tank in Ottawaand former chief economic analyst at Statistics Canada.

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