Tuesday, June 19, 2007
Anon comment worthy of republishing
This is a comment left on one of the freenewfoundlandlabrador blog recently thatI thought was worthy of repost. It is a long and comprehensive view and outlook on the NL economy as well as some suggestions on how to move our province forward.
Not sure who wrote it or posted it as there seems to be alot of references to other publications but whoever went through all of the trouble to compile this comment TY.
It took me three days to read through this particular comment and be able to absorb all of the content within. So if you like me just leave the window open and read at your leisure.
Not sure who wrote it or posted it as there seems to be alot of references to other publications but whoever went through all of the trouble to compile this comment TY.
It took me three days to read through this particular comment and be able to absorb all of the content within. So if you like me just leave the window open and read at your leisure.
"Current Economic Profile
Newfoundland’s economy continues to suffer from the sustained negative impacts of the fisheries moratoria and the large cutbacks in federal government transfer payments that were imposed earlier in this decade. Under the weight of these negative factors, the provincial economy actually experienced a recession (that is, a contraction in the output of goods and services) in 1996. The economy recovered somewhat in 1997, and growth is expected to pick up further in 1998 (to a robust 4 percent, largely on the strength of increased production and investment in the offshore oil industry).
Needless to say, unemployment has remained painfully high throughout the 1990s, thanks to the lack of sustained economic growth. The official unemployment rate still hovered at almost 19 percent by the summer of 1998, just one point lower than at the peak of the 1990-91 recession. But in reality, the problem of unemployment is actually significantly worse than the official unemployment statistics suggest. Many jobless Newfoundlanders are not included in the official unemployment statistics, by virtue of the fact that they are not considered to be "actively seeking work." In other words, the official unemployment rate excludes thousands of so-called "discouraged workers" in the province–those who would like to work if jobs were available, but who have simply given up hope of finding work, and hence (quite logically) do not waste further effort on a pointless job search. One symptom of the growth of discouraged workers is the decline in Newfoundland’s labour force participation rate–that is, the proportion of adult residents who are either working or actively seeking work. The participation rate fell from 56.2 percent in 1990 to just 52.8 percent (the lowest in Canada) in the summer of 1998. Without this decline in officially-measured labour-force participation, Newfoundland’s unemployment problem would look far worse. If these "missing" individuals were included in the labour force, the provincial unemployment rate would equal 24 percent.
There are other symptoms, too, of the shattering effect on Newfoundland’s labour market of the economic contraction of the 1990s. Total employment was still lower in 1997 than at the depths of the recession in 1992. No net jobs have been created in the province over the past decade. The only reason the unemployment rate has fallen at all since 1992 is not because of job-creation (there has been none over the past 6 years) but because of shrinkage of the labour force, due both to out-migration and to the growth of discouraged workers. The youth labour force (counting 15 to 24-year olds) has shrunk by almost one-third since 1990–again due both to out-migration and to young people simply abandoning hope of finding work.
Newfoundland’s Shattered Labour Market
· 15,000 jobs lost since 1990. No significant recovery.
· Official unemployment rate 19 percent. True rate is 24 percent.
· Participation rate declined by 3.5 points since 1990 (15,000 lost workers).
· 40,000 migrants left the province since 1992.
· Youth labour force down by _ since 1990 (17,000 lost young workers).
· 7 percent decline in real wage since 1994.
· 5 percent decline in personal disposable income since 1995 ($660 per person).
SOURCE: Statistics Canada, Provincial Economic Accounts (13-213) and Labour Force Annual Averages (71-201).
Another factor reflecting the incredible slackness in labour demand in Newfoundland and Labrador has been the erosion of wages in the province. In the last three years alone, real wages (adjusted for inflation) have declined by 7 percent. This compares poorly to a slight increase in real wages over this period in the rest of Canada. Even measured in nominal terms (without adjusting for inflation), the average worker in Newfoundland has not had a raise since 1993. Employers have the upper hand in any labour market in which supply so vastly exceeds demand, so it is no surprise that wages have fallen so quickly in Newfoundland during the 1990s.
Falling wages combined with huge cutbacks in government transfer payments have produced dramatically lower incomes for Newfoundland’s households. Disposable incomes per person have declined by $660 per person, in inflation-adjusted after-tax terms, over just the last three years. That represents a decline of 5 percent–and this in turn translates into reduced consumer purchasing power, fewer sales for Newfoundland businesses, and slower growth. In the face of declining disposable incomes, personal savings in Newfoundland and Labrador have totally collapsed, falling to zero in 1997. In 1990, Newfoundlanders accumulated savings from their disposable incomes at a slightly higher rate than the Canadian average, despite their lower incomes. Now they can save nothing. The collapse of personal saving is both a symptom of Newfoundland’s economic weakness this decade, and also a gloomy predictor of continued stagnation in coming years. How can a society develop economically, when its citizens cannot afford to save for the future?
Finally, in the wake of chronic unemployment and stagnant incomes, it is not surprisin to note that the meagre economic growth which has occurred during this grim decade has been grossly lopsided in favour of business. Between 1992 and 1997, Newfoundland’s overall GDP (the total value of goods and services produced in the provincial economy) expanded by just over 14 percent. Workers received virtually none of that expanded output. Corporate profits, on the other hand, shot up by over 120 percent. Small business incomes grew by about 30 percent. It is true, of course, that business needs profits in order to both finance and motivate expanded investment spending. But when virtually the entire growth of the economic pie is handed over to the business sector, then the economy becomes dangerously unbalanced. There is no growth of domestic purchasing power in households (let alone in the public sector) to supplement the expansion (such as it is) of private for-profit activity. As a result, the benefits of growth in the business sector do not "trickle down" to workers and their households.
Newfoundland and Canada
Cutbacks in federal transfer payments to the provincial government and to individual residents of Newfoundland have played a major role in the province’s economic difficulties in recent years. Between 1994 and 1996 alone,2 net federal transfers to the province declined by over $725 million, or about 7 percent of the province’s GDP. Any other jurisdiction which experienced such a dramatic reduction in incoming funds would also have suffered severe economic dislocation. For example, an equivalently sized cutback in federal transfers to Ontario would have equaled a $23 billion reduction for Ontario (several times greater than the actual federal cutbacks which were imposed on that province).
The federal cutbacks have been justified with strong moral messages about Newfoundland’s need to develop more "self-reliance," to "wean" itself from the nurturing of its mother in Ottawa, to resolve the economic "distortions" that have been caused by too much "dependence" on hand-outs. This stereotype describes the economic relationship between Newfoundland and the rest of Canada in unidimensional, unidirectional terms. In contrast to the popular image of Newfoundland as a persistent and annoying "drain" on the rest of the country, Newfoundland in fact makes a major economic contribution to the Canadian federation.
What Newfoundland Offers Canada
· $11 billion in Gross Domestic Product.
· $7.5 billion in consumer demand.
· Purchase of 21,000 new vehicles.
· $2 billion in federal tax revenues.
· $1.7 billion in manufacturing output.
· $3.4 billion in exports to the rest of the world
· $1 billion contribution to Canada’s trade surplus.
· $4.5 billion in imports from the rest of Canada.
· $3.3 billion trade deficit with the rest of Canada.
· 10,000 young, ambitious, educated workers per year.
SOURCE: Statistics Canada, Provincial Economic Accounts (13-213) and Labour Force Annual Averages (71-201).
The economy of Newfoundland and Labrador accounts for $11 billion in goods and services production. That equals about 1.25 percent of total Canadian GDP. If the entire economy of Newfoundland were to suddenly disappear from Canada, it would spark a recession in the rest of the country worse than the 1990-91 recession.
Despite their low and stagnant personal incomes, Newfoundlanders add $7.5 billion in consumer demand to the Canadian economy. Among other important industries, this translates into the annual purchase of over 20,000 new motor vehicles per year.
The province contributes $2 billion per year to total federal tax revenues, and $1.7 billion to the country’s total manufacturing shipments. Newfoundland’s contribution to Canada’s success in international trade is especially important. Newfoundland delivered $3.4 billion in exports to world markets during 1997. Newfoundland exported another $1.2 billion in exports to the rest of Canada. It is worth noting, however, the difference between Newfoundland’s net trade relationships–that is, its exports less its imports–with other provinces and with other countries. With the outside world, Newfoundland runs a $1 billion trade surplus–that is, the province exports $1 billion more to other countries than it imports from those same countries. This represents a significant contribution to Canada’s overall balance of payments.
With the rest of Canada, however, Newfoundland runs a much larger trade deficit. Newfoundland imports $4.5 billion in goods and services from those provinces, but exports only about $1.2 billion to those other provinces. Without the Newfoundland market, therefore, the rest of Canada would lose a trade surplus worth some $3.3 billion per year. In fact, Newfoundland’s trade deficit with the rest of Canada actually exceeds the net transfer of income into Newfoundland by the federal government. In 1996 (most recent data available), the federal government spent $3.1 billion more in Newfoundland and Labrador than it received back in taxes.3 In other words, every dollar of net federal payments to Newfoundland (and then some) is used to finance a large and ongoing trade deficit between Newfoundland and the rest of Canada. Without those transfers, an important market for business in the rest of Canada would likely dry up. So who is subsidizing whom?
Perhaps the most valuable, but also the most tragic, contribution of Newfoundland and Labrador to the rest of Canada is embodied in the province’s annual "export" of thousands of skilled, healthy workers fleeing the province’s devastated economy. With few regional job opportunities available, and no willingness of the part of the Canadian government to finance sensible development or adjustment programs, these Newfoundlanders–most of them young–feel they have little choice but to migrate to other provinces. Perversely, this out-migration is seen by mean-spirited advocates of economic "rationalism" as a sensible solution to the assumed "overpopulation" of Newfoundland, and a good alternative to social "dependence." But of course it leaves the province’s economy in even worse shape than it started out in. While the official unemployment rate might look lower in the wake of out-migration, the impact of depopulation on domestic demand, housing values, the provincial tax base, and the competitiveness of domestic businesses is hugely negative.
One hates to attach a dollar value to the immeasurable economic and social costs associated with this out-migration. But if we assume that each departing worker represents the capacity to earn an average Canadian wage ($31,000 in 1997) for 35 years, then the present value of each departing Newfoundlander to the rest of Canada is some $1.1 million. The 10,000 educated, healthy individuals who left Newfoundland for the rest of Canada last year thus represents an annual "subsidy" of $11 billion to other provinces. That represents an amount greater than Newfoundland’s total GDP, and almost four times greater than the annual value of net federal transfers to Newfoundland. Newfoundlanders raised these young workers, and the provincial and municipal governments paid for their health care and their education. Yet the value of their future work efforts will be appropriated by other provinces, in large part because of the refusal of the rest of Canada to make adequate provisions for economic development and adjustment in its poorest province. Once again we must ask: who is subsidizing whom?
Newfoundland in International Perspective
An implicit theme of the "depopulaters"–those who argue that the only long-run solution for young Newfoundlanders is to simply leave the province–is that Newfoundland’s rugged, remote economy is simply not viable in light of modern global trends. It is only by virtue of continued government subsidies that this outpost economy exists at all, or so the argument goes. This pessimistic view coincides with the popular stereotype that Newfoundland is an ongoing "drain" on the rest of the country.4
In the first place, this depressing conclusion goes completely against the grain of the faith in "free" markets and reliance on "supply and demand" forces that is also characteristic of those who rail against government "handouts." Get government out of the way, it is argued, and the free market will take care of the rest. In the textbook world of the perfect free market, a "rugged" environment should be no barrier to full-employment and rational efficiency. Supply and demand forces should ensure that all workers are employed in the most productive occupations possible. And that balance between labour supply and labour demand, in the free-market vision, should not require large out-migration to be attained. The pessimistic view of the "depopulaters," therefore, is itself an admission that free market decisions cannot ensure an adequate economic future for this province.
Northern Islands: For Richer or for Poorer
Newfoundland Ireland Iceland
GDP per capita
($Cdn., 1996) $18,700 $26,630 $36,930
Average GDP growth, 1992-97 (% per year) 1.3% 6.8% 3.2%
Average inflation rate, 1992-97 (% per year) 1.5% 2.2% 2.6%
Employment growth (%, 1992-1997) -1.0% +13.3% +5.4%
Unemployment rate (%, 1997) 19% 12% 4%
Labour force participation rate (%, 1997) 52.5% 64.3% 78.1%
Government programs as share GDP (%, 1996) 57% 34% 36%
Government taxes as share GDP (%, 1996) 43% 37% 36%
Government debt as share GDP (1997) 58%1 69% 32%
Average hourly manufacturing wage (1996, $Cdn.) $14.92 $16.052 na
Average growth real earnings (% per year, 1992-97) -0.8% +1.5% +0.6%
Personal saving rate (% disposable income, 1997) 0.9% 10.3% 14.2%
Population density (persons per sq. km.) 1.4 52 2.7
Passenger cars per 1000 people (1994) 386 264 434
Life expectancy at birth (years, 1992) 76 75 78
Infant mortality rate (deaths per 1000, 1995) 7.8 6.3 6.1
SOURCE: Statistics Canada, Canada Year Book 1997, Provincial Economic Accounts, Labour Force Annual Averages, Annual Estimates of Employment, Earnings and Hours; U.S. Bureau of Labor Statistics, International Comparisons of Hourly Compensation Costs for Production Workers in Manufacturing, OECD Economic Outlook, OECD Economic Surveys for Iceland (1998) and Ireland (1997).
1. Provincial level only.
2. Assumes 20 percent non-wage benefits in total hourly labour cost.
More importantly, those who argue that Newfoundland’s economy is in some sense fundamentally unviable ignore the successful experience of other countries which have developed productive, socially beneficial economies despite similar difficulties of geography and remoteness. Iceland and Ireland, for example, are also small, rugged northern islands. Yet these two economies have enjoyed faster growth, higher living standards, and lower unemployment than in Newfoundland (see table).
How do we explain the disappointing difference between the progress of Newfoundland and the progress of other comparable jurisdictions? Since these other northern islands are independent national economies, their governments have more policy levers at their disposal than does a provincial government: more control over interest rates, exchange rates, immigration, and fiscal policies. Similarly, these islands will not have been hard-hit by spending decisions made by other levels of government–such as the radical downsizing of federal transfers in the 1990s. (Of course, those other islands did not benefit from the inflow of those transfers when they were still occurring–although Ireland does receive significant regional development transfers from the European level of government.) Iceland, like Newfoundland, is very dependent on the fishing industry, and a case can be made that Iceland’s fish resources were managed more sensibly than Newfoundland’s, and hence Iceland has not experienced the same devastation from the collapse of fish populations. Iceland’s economy is based on exports (including metal processing and refining developed on the basis of geothermal energy) and high-value services (including extensive social services) produced for the domestic economy. Ireland’s economy has been driven by manufacturing exports to the European Community and (more recently) by the demand growth generated by the return of thousands of former emigres. Ireland and Iceland both benefit from much higher rates of domestic saving, generating funds which are channeled aggressively into public and private capital formation. Domestic, independent financial institutions and investment intermediaries also contribute to faster growth.
Perhaps the greatest differences between Newfoundland and these other island economies are their human resources–the number of people who reside there, and the extent to which their respective governments treat those human resources with care and respect. One immediate contrast between Newfoundland and the other islands is apparent by examining population density: Newfoundland’s population density is barely 2 percent of Ireland’s, and one-half of Iceland’s.5 Ireland and Iceland have both invested heavily in the skills and education of their citizens, turning the rhetoric of training (which is propogated every day in Newfoundland) into an economic reality. For example, both countries maintain well-funded public university systems, with no tuition fees. Newfoundland, on the other hand, has increased its reliance on private for-profit training providers, subsidized through dubious retraining provisions of UI and other programs–which have proven in experience to be painfully prone to bankruptcy! The state plays a generally more active and interventionist role in directing the economic development of both Ireland and Iceland; Newfoundland’s public sector, on the other hand, is retreating fast.
There is no single, simple recipe for the economic success of Ireland and Iceland which could be followed for Newfoundland’s benefit. Each island economy has its own specific circumstances which must be reflected in its respective development plans. What is clear, however, is that the mere fact of being an isolated, rugged island hardly implies inevitable poverty and stagnation. If anything, the more difficult geographical context of an island economy may be beneficial in forcing its residents to identify and develop non-geographical assets–and especially its human resources. A successful economy needs people: healthy, well-educated, energetic, and optimistic people. With that key ingredient, any economy can thrive and grow, no matter how rugged its physical setting. The gradual loss of Newfoundland’s greatest asset through out-migration, and the withdrawal by governments at all levels from the investments that need to be made in human well-being, represent the true source of Newfoundland’s weakness–not its rugged geography or its remote location.
What Hasn’t Worked for Newfoundland
Before moving on to consider some of the alternative policy directions which might shift the economy of Newfoundland and Labrador onto a faster growth track, it is worth reviewing the record of the business-centred development strategy which has been so much in vogue during the last two decades. The core idea is that if we create a very favourable environment for private, profit-seeking businesses, new investment by those businesses will boom and the whole economy will expand as a result.
A Paradise for Business?
· Record-low inflation (1.5% per year since 1992).
· Government programs shrank from 66% of economy in 1992 to 57% in 1996.
· Public-sector employment down by 3,000 (or 15%) since 1990.
· Corporate profits up 125% from 1992 to 1997.
· Effective provincial corporate tax rate down from 15% to 8% since 1992.
· EDGE land and tax giveaways.
· Provincial government financial surpluses for 3 consecutive years.
· Steep fall in provincial debt burden: 64% of GDP to 53% since 1996.
· KPMG Study: St. John’s most cost-effective site in North America.
SOURCE: Statistics Canada, Provincial Economic Accounts (13-213) and Labour Force Annual Averages (71-201); Newfoundland and Labrador Budget 1998, Exhibit V.
The sorts of conditions that are considered to be especially attractive to business include:
· small government; few regulations
· balanced government budgets and low government debt
· low inflation
· low wages
· a skilled, readily available workforce
· weaker social programs (to encourage labour force "discipline")
· lower taxes on businesses and the high-income people who own and manage them.
Both the federal and provincial governments have accepted this economic philosophy as the mainstay of their economic and social policies. The notion that creating "healthy fundamentals" will eventually pay off in faster business-led growth has been repeatedly invoked to justify a range of policy measures that have brought immediate pain and hardship to average working people. And by the standards of this business-centred development strategy, Newfoundland’s economy should be booming today.
The reduction of the role of government in Newfoundland’s economy has been especially marked. Total program spending by all levels of government in Newfoundland declined from 66 percent of provincial GDP in 1992 to some 57 percent in 1996–and it has certainly fallen farther since then. The provincial government budget has been effectively balanced for three consecutive years.6 Public sector employment has declined by 15 percent since 1990.7 The provincial debt has fallen steeply as a share of provincial GDP, from 64 percent in 1996 to less than 55 percent today. In short, Newfoundland’s public sector–which has long been a mainstay of the provincial economy–has been radically downsized. Has private business stepped into the void to take up the economic slack? Not exactly: it turns out that laying off public servants is more likely to simply increase unemployment, than it is to spark a great resurgence of private entrepreneurship. The notion that "big government" was somehow squeezing private business out of the picture was never believable in Newfoundland’s case: how could it be argued that the public sector was taking up too much economic room, when there were still tens of thousands of unemployed workers and abundant underutilized resources just waiting to be put to work? The failure of the private sector to fill the economic void created by public sector downsizing is further evidence that Newfoundland’s economic problems were not the fault of too much government. Rather, the province’s fundamental difficulty has arisen from the failure of private markets to ensure that available economic resources (including, most importantly, people) are put to work.
A similar result has occurred in Newfoundland’s labour market. Public income security programs have been radically scaled back–none more so than the Unemployment Insurance program. UI benefits paid to Newfoundlanders declined by $430 million (or over 40 percent) between 1990 and 1996, even though the number of unemployed in the province actually increased during this same period. And there is ample evidence that the worst is not over yet. On a seasonally adjusted basis, the number of regular UI recipients has declined steadily since 1996 in the face of new eligibility restrictions. Other income security programs–most notably the TAGS program–are also under attack, again in the name of helping idle Newfoundlanders to recapture that spirit of "entrepreneurship" which has evaded them in the past. Has cutting desperate people off of their income security restored that "get-up-and-go" initiative that the free market demands? Not exactly. Self-employment in Newfoundland actually declined between 1994 and 1997–in contrast to the trend elsewhere in Canada, where self-employment grew by almost 20 percent during this same period. And paid employment in the private sector was similarly stagnant. Total employment in the province was still 15,000 lower in August 1998 than it was in 1990–before our UI system became radically "rationalized." It is not a lack of initiative that is the problem in Newfoundland’s labour market: it is a lack of strength in the provincial economy. It turns out that rather than undermining private initiative, a well-functioning social safety net might actually enhance it–by putting money in peoples’ pockets, and providing a demand base on which local businesses can depend. The chilling impact of social cutbacks on personal incomes and consumer confidence in Newfoundland has far outweighed any conceivable "distortionary" impact those programs had on the "initiative" of Newfoundland workers.
The financial situation of private businesses in Newfoundland and Labrador has indeed improved under the business-centred development model espoused by the federal and provincial governments. For example, before-tax corporate profits in Newfoundland grew by 125 percent between 1992 and 1997. And corporate tax collections did not keep pace with this windfall: the effective provincial corporate tax rate fell from 15 percent in 1992 to 8 percent in 1996 (most recent comparable data); in contrast, the average provincial corporate tax rate in other provinces that year was over 13 percent. No other province relies less on corporate income taxes as a share of total provincial revenues than Newfoundland. Private firms have benefitted from a battery of location incentives, including free land and other giveaways, under the provincial EDGE program and other initiatives. Has the real economic effort of the business sector responded accordingly to this ultra-attractive climate? Business investment has indeed grown this decade, largely thanks to offshore megaprojects. But the scale of the increase is small relative to the scale of the increase in corporate profits. For example, between 1993 and 1997, business investment spending grew by just 8 percent–less than one-tenth the 89 percent rise in corporate profits over that same time period.
Obviously, the provincial government needs to continue its efforts to attract new business investment to Newfoundland. This investment is a key source of growth, job-creation, and diversification. Even measures like corporate tax holidays for new investment projects can be effective tools in stimulating new investment–particularly given that other jurisdictions (such as many U.S. states) are able to offer large up-front cash subsidies for new investments in manufacturing and other key sectors. The income generated for government and for the economy as a whole from these types of investments can more than offset the cost of the foregone taxes. But efforts to attract new business must not undermine the social and legal status of Newfoundlanders, nor impair their ability to win a fair share of the expanded economic pie that results from these investments. In this context, the suggestion that basic labour rights (such as the right to strike) should be suspended in the interests of attracting investment is repulsive and must be rejected completely. And efforts to woo business investment must be placed in their proper economic context. Business investment will never respond sufficiently to the incentives of higher profits and an underutilized, desperate workforce with enough new investment to offset the lost economic potential that results from falling wages and a downsized public sector. Growing business investment can be one pillar of a balanced development strategy. But if we undermine the other pillars of that strategy–household demand and a vibrant, ambitious public sector–in order to motivate marginal improvements in business investment, then we are surely cutting off our nose to spite our face.
Privately, the architects of the business-centred development strategy must be richly disappointed with the meagre results of their project. Despite a decade which has seen the most radical downsizing of government in Canadian history, and the unprecedented rollback of important social programs, the response of business to this brave new world has been at best lacklustre. And whatever recovery Canada was enjoying later in the 1990s may now be cut short by the turmoil arising from the same private financial markets to whom we have granted so much influence over our economic policies. Gutting Unemployment Insurance has not magically created new jobs–but it has left a lot of poor people even poorer. Downsizing government has not magically enhanced private sector job-creation–but it has left a weak labour market even weaker. Enhancing the profit motive has not stimulated a huge new economic effort by business–but it has made the strong bargaining position of businesses even stronger. Perhaps these right-wing policy changes were motivated less by a desire to expand the economic pie, than by a desire to redistribute it–from the bottom towards the top. If we really want to expand economic opportunities for the rest of us, we need to start thinking in a new economic direction.
Newfoundland’s Strengths and Weaknesses
In thinking about a direction for the Newfoundland and Labrador economy that might be more effective and socially beneficial than the current business-centred approach, it makes sense to start with an inventory of the province’s economic strengths and weaknesses. Some of the province’s strengths are well-known, of course. Relative to its population, Newfoundland and Labrador possesses a huge land mass with an incredible wealth of natural resources. The province probably ranks only behind Canada’s northern territories as possessing the greatest resource abundance per resident. The province is keenly competitive in interprovincial and international trade: low labour costs, relatively cheap resources (including low energy costs in future years, thanks to the coming development of petroleum and hydroelectric resources), and the low value of the Canadian dollar all contribute to the province’s ability to participate successfully in trade. The skills and capacities of Newfoundlanders themselves, of course, are the province’s greatest asset–although this is threatened, unfortunately, by the chronic underutilization of labour in the province and cutbacks to the very sorts of investment in human capacities (education, health care, and social security) that are required to maintain and enhance that human wealth.
· Natural Resources
· Trade Competitiveness
· Skills & Human Capacities
Other of the province’s strengths are less well-known–probably because business-oriented newspapers and development experts are less interested in espousing them. For example, Newfoundland has the largest proportion of trade union membership (measured as a proportion of employment) of any province in Canada. This reflects a variety of causes: the province’s relatively large public sector, and a tradition of cooperation and community self-reliance that is reflected in widespread unionization even in dispersed industries (such as fishing) that would otherwise be hard to organize. Wages in Newfoundland are low, relative to the rest of Canada–and even more so in comparison to other countries. Newfoundland is very competitive in terms of the cost of productive inputs (such as labour, resources, and land). It is only because of other factors (considered below) that local enterprises face difficulty surviving. So it cannot be argued that strong unions have somehow priced Newfoundland out of global competition. And as a vehicle for channeling the collective participation of Newfoundlanders in their economic future (through bargaining in the workplace or policy-development in the political arena) Newfoundland’s unions are clearly one of the province’s economic assets.
Newfoundland’s Record of Equality
Criteria Score Rank
Income Distribution (Gini Coefficient) 0.334 1
Ratio of Hourly to Salaried Worker Earnings 79.9% 4
Public Spending per Capita $10,781 3
Social Assistance Rate (1 parent, 1 child) $11,262 4
Overall Equality Index 103.6 2
SOURCE: Economic Freedom for the Rest of Us, by Jim Stanford (Ottawa: Canadian Centre for Policy Alternatives, 1998).
It is rare for Newfoundlanders to see themselves at the top of interprovincial rankings; usually the province is stereotyped as lagging the rest of the country. But in the important matter of economic equality, Newfoundland and Labrador also has an outstanding record. According to Statistics Canada data, Newfoundland has the most equal distribution of income in the entire country. And on other criteria of equality and economic security, Newfoundland also scores high. Earnings are paid out relatively equally between hourly and salaried or supervisory workers, for example. And relative to the province’s level of economic development, social assistance benefits (for families with children, at any rate) rank relatively highly. On a composite measure of equality and social security recently constructed by the Canadian Centre for Policy Alternatives,8 Newfoundland ranked second among all provinces (behind only Prince Edward Island) in its overall record of economic equality. How is equality an economic advantage? Many important benefits spring from a more equal distribution of income and economic opportunity. For example, if wages are distributed relatively evenly in a society, this implies that labour costs in relatively high-wage occupations (such as high-tech manufacturing or high-value service industries) will be competitive in comparison to jurisdictions where income distribution is poor. This will help to attract these desirable industries to the province. Similarly, when income distribution is quite equal, a greater culture of social solidarity is promoted: the members of a community feel that they will rise and fall together, and this can lead to more efficient and effective adjustments to economic changes and new opportunities than in a culture in which the economic pie is divided according to brute force and the law of the jungle.
What about the province’s economic weaknesses? Despite an abundance of resources (including human and social resources) which are priced relatively cheaply, Newfoundland can still be an expensive place for companies to operate. The main culprit here is geography (both physical geography and social geography). As a relatively remote region, the costs of transportation, communication, and infrastructure services linking the province to other markets are proportionately very high. This offsets the province’s cost advantage in terms of locally supplied productive inputs (relatively cheap labour, resources, and land), making Newfoundland a relatively expensive place for export-oriented businesses to operate from. And the lack of a concentrated population base means that enterprises producing for the domestic market will not enjoy the inherent efficiencies and economies of scale that typically come with production in larger volumes.
· Remoteness From Major Population Centres
· Small Population
· Lack of Investment
· Lack of Demand
The result is a general shortage of private business investment, which is a crucial driving force of economic growth. Despite an incredibly favourable pro-business regime of low taxes, generous incentives, cheap labour, and other factors, private investment remains weak. That investment which has occurred has been dominated by offshore megaprojects which are welcome but too unpredictable to be the sole base of the provincial economy. Combined with government cutbacks and low personal incomes, the result is a general lack of demand in the provincial economy–too little spending power, and hence too little demand for the workers who produce the things we need. This in turn undermines business investment even further, especially for businesses focused on the domestic (rather than the export) market–since there is no growth in demand for the products that those businesses would supply. Somehow this vicious circle of slow investment and weak demand must be turned around. And we have already seen that the private sector by itself cannot do the job, no matter how large are the carrots dangled in front of its nose.
A New Direction
A fundamental shift in the basic philosophy of economic development is required in order to push the Newfoundland and Labrador economy onto a more dynamic, socially beneficial track. Rather than assuming that private business alone is the only player that really matters, and hence that the main task of government must be to make the environment as business-friendly as possible, it is necessary to remember that the purpose of economic development in the first place is to improve the lives of people. Let’s elevate those people to centre-stage in our thinking about economic development and how it occurs, rather than hoping that the trickle-down benefits of private, profit-led activity will somehow suffice.
A people-centred development strategy would have many different elements, but linking them all is a fundamental willingness to question the efficiency and desirability of private markets as the fundamental organizing principle of the economy. Yes, private markets and the actions of private business are going to play a crucial role in any economy. But we need to keep an eye on those markets to ensure that their workings are compatible with the fundamental goals of economic development: growth, equality, and well-being. And where this is not the case, we need to be willing and able to step in with measures to correct and supplement what those markets do.
The alternative to "markets" is not necessarily "big government." This is an artificial dichotomy that has been well-established by pro-business editorialists and economic experts. Private markets are rooted in the self-interested activities of individual companies, who seek to maximize their individual profits (and in so doing may or may not produce something of value to the community as a whole). The true alternative to this individualistic, profit-inspired model is a form of growth rooted in the cooperative, collective activity of the members of a community who get together and consciously undertake some form of work activity in the interests of concretely improving the quality of their lives. Government is one important way in which this collective activity takes place (through the organization and provision of public services like health care and education, for example). But it need not be the only way. Other forms of collective, cooperative economic activity can also be important: co-ops, community economic development projects, non-profit or charity activity, or even the simple co-operation of neighbours who get together to build a new dock or a children’s playground. Particularly in an economy such as Newfoundland’s, which has been under-served and at times outrightly abandoned by the profit-seeking private market, stimulating and diversifying these various forms of non-market economic activity must be a crucial element of any future development strategy. Yet the specific policy conclusions which emerge from an alternative, human-centred model can be quite at odds with the "lean-and-mean" dictates of the business-led approach.
Let us consider some of the specific economic and social policies that could form part of this alternative development strategy.
Rebuild Public-Sector Activity: The rapid downsizing of the public sector in Newfoundland and Labrador has not led to an upsurge in private-sector growth. Far from it: more idleness and poverty has been the main result of this "rationalization." The province needs to step up its investment in important public services and infrastructure: health care, education, transportation, communication. In so doing it will both enhance the skills and capabilities of its workforce (especially its young workers), and simultaneously provide interesting jobs for many of those workers to fill. The underdevelopment of Newfoundland’s rural and urban areas alike implies a tremendous opportunity for productive public investment in housing, transportation, and public services. How could the province pay for these investments? Government budgets do, indeed, need to be roughly balanced (on average) over the business cycle.9 But by focusing its spending activity on domestic services and investments with a high Newfoundland-content, the province can maximize the economic spin-offs resulting from its own projects, and hence capture back much of the expense in the form of incoming revenues.
Focus on Meeting Domestic Needs: Exports will play a crucial role in any economy, and particularly in a small economy such as Newfoundland’s. The vast majority of manufactured goods and other specialized materials will be imported of necessity, and hence the province must export enough to pay for those imports. But this does not imply that export-industries should be the sole focus of development (as is usually the case in a business-centred philosophy). Indeed, by shifting the structure of both demand and supply in the provincial economy toward what economists call "non-tradeable" goods (products and services which are produced and consumed locally), the province can help to overcome its greatest disadvantage: its small size and remote location. Imagine taking 20,000 of the province’s unemployed workers and putting them to work providing public services or building roads and housing for the province’s own residents. This creates a new source of income for residents (those who are employed in these projects) that is not dependent on exports. It simultaneously makes the provincial economy more competitive in the export race (healthier, better-trained workers; modern efficient infrastructure). And the taxes collected to pay for those projects reduce the extent to which purchasing power in the province is undermined by imports of consumer goods and other manufactures. It is not easy, of course, to argue for taxes. But we can make a convincing case that a picture in which someone is employed but paying taxes at a higher rate (and thus consuming a large share of their total income in the form of collective public services) looks a lot better than one in which the person pays a lower rate of tax on a non-existent income.
Manage Trade and Investment: To maximize the spin-off benefits for the provincial economy of those private export and investment projects which do occur, government must take an energetic, pro-active role in negotiating and regulating their overall economic effects. This means pushing for a high Newfoundland content in those investment projects which benefit from public incentives, regulatory approval, or resource grants. In this regard, the current government’s hard line in negotiations over the Voisey’s Bay project is entirely appropriate, and goes completely against the grain of the "free-market" thinking which dominates the rest of government policy in the province. Private companies will always claim publicly that these types of regulations will "bankrupt" them and "force" them to cancel their projects entirely. But in reality, companies will respond favourably to a sufficiently-profitable opportunity, regardless of the degree of government intervention which oversees that opportunity. A similar approach could be taken with regard to negotiating Newfoundland content (or equivalent "offset" commitments) in return for major purchases (especially public purchases) of imported manufactures or machinery. Examples of purchases for which this strategy would make sense include major public procurement of products such as computers, motor vehicles, and machinery. Even if Newfoundland does not currently manufacture the product in question (as will usually be the case), companies faced with an appropriate incentive will be quite creative in finding products or services that it can produce or purchase in the province in order to meet provincial-content guidelines. If an importing company benefits from a substantial injection of Newfoundland purchasing power, then it should be obliged to take measures (through local purchasing or investments) to sustain that purchasing power. Once again, this type of intervention goes completely against the grain of the laissez-faire thinking reflected in policies such as the Interprovincial Free Trade Agreement (an agreement which has not yet demonstrated that it has any real force anyway). But if the end-result is more jobs and more production in the province, then the provincial government should not shy away from applying the tough talk it has practiced with Inco on major importers. And for any product or service which can be produced in Newfoundland, a very strong Newfoundland-first policy should guide any procurement for public agencies or publicly-regulated companies.
Activist Sectoral Development Planning: Newfoundland’s economy is the sum of its respective industries and sectors. All of these sectors–fisheries, mining, forestry, manufacturing and processing, private services, and public services–need to make a stronger contribution to the province’s overall growth and development. And in no case will that stronger contribution occur solely as a result of "free market" forces. The provincial government and non-government bodies (including the labour movement) need to take a leading, energetic role in developing and implementing sector-specific development plans for each of these industries. While the details of these sectoral plans will obviously vary, they will include some common themes:
· enhance value-added in the Newfoundland economy
· coordinate and regulate investment in accordance with social costs and benefits
· upgrade the contribution (and subsequently the earnings) of labour
Private business will obviously play an important role in this sectoral economic planning, and a structure of sectoral development councils could be established to facilitate exchange and decision-making amongst the various stakeholders in each industry. But these councils will degenerate into symbolic roundtables unless government arms itself and the other non-business participants with the real resources and decision-making powers (such as public equity stakes in industrial developments and strong regulatory oversight over private investments) which can force business to take the process seriously. Examples of the sorts of sectoral plans which could make an important contribution to the provincial economy in future years would include a coordinated strategy to enhance volumes and value-added in non-traditional fisheries, a shipbuilding and marine construction policy to enhance the level of Newfoundland content in offshore petroleum developments, and a public-private training and investment strategy to stimulate the development of high-value communication and technology services–to move Newfoundland’s participation in this crucial sector beyond call centres.
Promote Community Entrepreneurship: The government needs to actively foster the sorts of community-rooted, non-profit economic activity that will be essential for filling the void left by the failures of the private sector. It is naive to expect that residents of the province will somehow naturally organize themselves into community-based projects aimed at meeting fundamental community needs. There is a huge degree of initiative and creativity amongst those who are working so energetically in non-profit development projects, but the government needs to pave their way with a structure of incentives and encouragement that is at least as ambitious as the carrots they hold out to private companies. Many different sorts of policies would be useful in this regard. For example, one important structural weakness in the Newfoundland economy is the lack of an indigenous financial industry, which leaves the province dependent on investment decisions made offshore. The drain of purchasing power in the form of profits and salaries to offshore-based financial service providers further undermines provincial economic activity. Why not move to establish a public provincial bank, and/or a more powerful provincial network of credit unions (sufficiently coordinated so as to be able to finance major projects)? The government could support this development with favourable enabling legislation and (more importantly) by directing its own purchases of financial services (and those of provincially regulated industries) through the new home-grown financial industry. Other measures to support the "social economy" might include legal and economic support for non-profit and charitable activities.
A Change in Federal Perspective: Much can be done within Newfoundland and Labrador to improve the province’s economic trajectory. But recent federal government policies have cast a huge economic pall over the whole province. And undoing some of that damage from the federal side of the relationship would do a huge amount to restore the momentum of the provincial economy. The federal government’s approach to deficit-reduction at the expense of Canada’s neediest individuals and least developed regions has been both mean-spirited and economically destructive. A whole new approach from the federal government is needed in numerous areas: fisheries management and adjustment programs, Unemployment Insurance, and interprovincial transfers are clearly the most important. Simply changing the fundamental belief that dominates Ottawa these days–namely, that government can do nothing better for the economy than get out of the way–would be huge step forward, and would relieve much of Newfoundland’s economic hardship. The federal government should adopt an economic and fiscal strategy much like that advocated by the Alternative Federal Budget–emphasizing debt-reduction through economic growth rather than spending cutbacks, recuperating the social safety net and the "fiscal federation," and redistributing the burden of taxation onto those that can best afford it.10 Economic simulations have shown that the fiscal and economic benefits to provincial governments of an AFB-type program of lower interest rates, more federal spending, and faster economic growth would be huge. And with a stronger base level of growth and incoming federal transfers, the provincial government would have all the more resources available to support its own energetic development strategy. It is easy to blame the policies of a far-off government for domestic problems, but in Newfoundland’s case this is very much justified. It is time the federal government became part of Newfoundland’s solution, rather than its problem.
Getting Really Creative
Desperate times demand desperate measures. If this adage is true, then we need to perhaps get even more creative and far-reaching in our thinking about Newfoundland’s economic future. In light of the province’s fundamental economic strengths and weaknesses, here are some unconventional suggestions that might help to get the provincial economy back on track. None of these policies could be implemented tomorrow; some would require a long-term redefinition of provincial government powers. But they are suggested here as topics for further discussion and debate.
A New Immigration Policy: Part of the weakness in the economy of Newfoundland and Labrador stems from having too small of a population spread out over too great of a land mass. This problem is made worse, obviously, by current out-migration from the province. Newfoundland’s economy would receive a major boost from new migration to the province–providing the human energies and skills that are needed to fully develop the province’s economic potential. There are millions of people in the world for whom a new life in Newfoundland would be a welcome escape from poverty or war. Why not develop an immigration policy that brings some of these people to the province? At present almost none of the quarter-million immigrants to Canada each year settle in Newfoundland; they go instead to Toronto, Vancouver, Montreal, and other major cities where support services are more developed and jobs more abundant. In so doing they add significantly to the growth of those vibrant cities. It is a myth that immigrants "steal" existing jobs from the initial residents of a city or province; in fact, immigration creates new jobs (for immigrants and existing residents alike) thanks to new demand for housing and services and as a spin-off of the business activities that the immigrants undertake. The provincial government should consider negotiating an immigration pact with the federal government which would help to direct a fairer share of immigrants (perhaps 5,000 per year) to Newfoundland–along with a fair share of funding for the necessary adjustment and social programs. Failing that, the government should consider developing an independent immigration policy (as the Quebec government seeks to do), so that immigration can be opened and managed in a fashion consistent with the economic needs of the province. Of course, large-scale immigration carries with it many difficulties of social and economic adjustment. But in the long-run, a much more open immigration policy could be an important plank in the development of Newfoundland’s physical and human resources.
An Alternative Provincial Currency: One fundamental difficulty in using provincial programs to spur new economic activity in the province is that much of the resulting economic stimulus "leaks out" of the province (through purchases of imported products by consumers and businesses). This undermines the extent to which Newfoundlanders are able to mobilize their own economic resources to meet their own social and economic needs. The gradual development of an alternative provincial currency, which would be used to facilitate particular types of economic transactions within the domestic economy, could make a positive difference here. Private businesses have long recognized the usefulness of alternative monetary systems to channel expenditure into particular areas: witness the growing use of programs such as frequent flyer points or merchandise "reward" money to compensate customers and attract demand. Like these programs, a provincial currency would have some positive economic value (although not a "par" value with "real" money), and it would be used on particular types of transactions (rather than generally accepted within the economy as a whole). It would be similar in concept to local trading networks which are commonly applied in community development initiatives–except writ large, with the official sponsorship of a provincial government, to enhance its scope and usefulness. Consider, for example, a major expansion of provincial public works and social services undertaken as part of an ambitious job-creation strategy. Suppose that individuals who were placed in new jobs through this program received a share of their compensation (say 20 percent) in the form of the provincial currency.11 They could spend that money on any of the newly produced public services that they themselves helped to generate, or on any other provincial program (such as university tuition, or drivers’ license fees, or perhaps even energy from a provincial crown corporation). They could also trade the provincial currency for "real" money through some currency exchange system (with the "exchange rate" determined by the relative supply and demand of the provincial currency).12 It would be a challenging and radical initiative to attempt to establish such a system, one that fundamentally challenges the existing domination of private finance over our economy. But it could possibly play a useful supporting role in the process of trying to overcome the great gulf of purchasing power in the provincial economy–the seemingly anomalous co-existence of unused resources (especially labour) with unmet needs for more goods and services.
Local Employment Boards and the Right to a Job: Here is another far-reaching idea that would also try to address the irrational coexistence of idle labour with unmet social needs. Newfoundlanders want to work. And there is a list of a thousand things we need them to do: repair roads, improve schools, care for the elderly in their own homes, build new homes, educate young people and displaced workers alike. One institutional factor preventing society from resolving this apparent contradiction is the lack of formal accountability placed on any governing body for ensuring that idle human resources are used wisely. At present all communities have school boards which are charged with the responsibility of educating all children in the community–and which are provided with tax revenues to perform that task. Why not empower similar "community employment boards" whose mandate would be to arrange for the employment of all willing residents of their communities? In part the boards would be designed to play a planning function: conducting an inventory of local labour resources, evaluating the training and adjustment needs of the workforce, identifying and promoting employment opportunities. But in part the boards would also function as job-providers in and of themselves–as "employers of last resort," who would be responsible for putting idle labour work in projects of at least some social value, overcoming the failure of the private labour market to find work for all willing workers. Many difficult economic and political issues would have to be addressed in the course of developing such a structure: their funding, their method of election and accountability, the protection of labour standards in employment board projects, the interaction between employment board hiring and the private labour market. But the fundamental premise is an important one: willing workers have the right to a job, and if the private labour market fails them then society has a responsibility to collectively find something for them to do.13
There are a wide variety of policy measures, big and small, that will be required in order to stimulate a more lasting, balanced, and socially beneficial path of economic development in Newfoundland and Labrador. Newfoundland’s economic difficulties are numerous and varied; and there is no single recipe that can be followed to resolve them all. What is clear from the province’s current predicament, however, is that the current strategy of relying on private business as the sole engine of development, and focusing solely on making Newfoundland as business-friendly as possible, will fail–both as an economic development strategy, and more fundamentally as a means of bettering the economic conditions of the vast majority of the province’s residents. We need a more diversified and socially accountable vision of economic development–one that is interested first and foremost in the economic improvement of our communities. The policies proposed in this document do not yet constitute a fully-developed strategy in this regard. But they are a step in the right direction, and will hopefully spur wider discussion about a more broadly-based approach for Newfoundland and Labrador.
1 The views contained in this report should be ascribed to the author, and do not necessarily represent official policies of the Newfoundland and Labrador Federation of Labour or of the Canadian Auto Workers.
2 This is the most recent comprehensive data published by Statistics Canada. Federal transfers have continued to decline since 1996, but consistent data is not yet available showing by how much.
3 Data for 1997 are not yet available, but net federal transfers were certainly smaller than they were in 1996, and thus the point is even stronger than indicated in the text.
4 A particularly objectionable statement of this view can be found in the recent Industry Canada report, "Regional Disparities in Canada: Characterizations, Trends, and Lessons for Economic Policy."
5 Moreover, Iceland’s population is concentrated in the island’s major city, and hence its economically effective population density is higher than the average statistic suggests.
6 While strictly speaking the government has incurred a small annual deficit since 1996, its net financial requirements have actually been negative (in other words, the government takes in more money than it spends). The difference between the two measures is due to the inclusion of non-cash items (such as public service pension obligations) as current expenses.
7 This figure includes only employment in narrowly-defined public administration. Other jobs have been lost in broader public services such as health care and education, but comparable numbers were not available.
8 See Economic Freedom for the Rest of Us, by Jim Stanford, forthcoming in autumn 1998 from the Canadian Centre for Policy Alternatives, Ottawa.
9 More precisely, the ratio of provincial debt to GDP needs to be stabilized. The recent steep fall in the debt ratio implies that the province has more fiscal room than it claims.
10 See The 1998 Alternative Federal Budget Papers (Ottawa: Canadian Centre for Policy Alternatives) for the most recent set of AFB policy statements.
11 This strategy for funding the expansion of public services would have to be very carefully negotiated with public service unions, of course, to ensure that prevailing wages and working conditions were not undermined.
12 The afore-mentioned proposal for a provincial bank or strong network of credit unions would be quite compatible with this function.
13 The idea of employment boards is discussed in more detail in The Ontario Alternative Budget Papers (Toronto: Lorimer, 1997), Chapter 4." -" NEWFOUNDLAND, REPUBLIC OF "forever!!!
June 19, 2007 12:12 AM
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