Canada’s resource wealth: necessary but insufficient

It’s become near-orthodox belief that Canada’s natural resource wealth endows the country with a superman-like ability to withstand shocks in the global economy. As many an editorial on the state of the Canadian economy has noted, “Compared to its Group of Seven peers, Canada emerged from the financial crisis relatively unscathed in part due to its strong banking system and wealth of natural resources, and it was among the first economies in the developed world to move from the recovery to expansion phase. “ I was presented with this rationale last week during a meeting with a very-well regarded and influential President of a Canadian university, and with resource exports amounting to near $200 billion per year, there’s no doubt that what’s in the ground is indeed an important part of our economy.

But such numbers need to be digested with a critical mind. For while the aggregate total revenue from resource extraction is indeed important, it’s broader impact on employment, both direct and indirect, is far less impressive. For while resources comprise near 40% of Canada’s total exports (which works out to about 4% of total annual GDP), the sector employs only 226,000 Canadians. Compare that to the over 1.5 million who (still) work in manufacturing, the 1.7 million in healthcare and 1.8 million in retail. In fact, resources contribute a measly 2.5 jobs per dollar of GDP compared to 9 jobs for every unit of manufacturing activity, 10 jobs per construction dollar, 24 jobs per retail dollars and a whopping 37 jobs per food services dollar. Evidently, this doesn’t infer that a retail or food service dollar is the way forward, quite the opposite. However, what’s clear is that resources are far from a significant (direct) creator of jobs in Canada. Certainly, resource extraction and its subsequent sale, creates significant revenues, profits and spending that circulates in the economy, however this is true for all forms of economic activity.

For want of easily accessible Canadian data, let’s use US industry multipliers as our guide.  The US Bureau of Industry and Security (…think about that combination for a minute…) estimates an industry multiplier of 1.50 for petroleum and gas extraction, and a 1.65 multiplier for other mining activity. By way of comparison, manufacturing provides an average multiplier of 2.31 and services and retail roughly 1.6.  Applying those multipliers to related export income streams yields what I’ll call a ‘full-impact’ GDP total of $311 billion for resource-related income, a third of the nearly $ trillion ($CAD) in manufacturing-related income.  Resources are a significant source of income for Canada but insufficient as a means of ensuring broad employment, especially in an economy where the primary manufacturing sector has seen approximately 350,000 jobs losses since 2006, and about 600,000 since 2000. The (usual) downgrading of those manufacturing jobs to retail and service positions reduces the associated income multiplier thus requiring other industries to pick up the slack. Yet what seems to have replaced those higher-value jobs (measured in terms of multiplier) is construction and retail employment, and to a lesser extent financial services and healthcare. This mirrors Canada’s aggregate position, whereby since 2001 Canada’s manufactured output has grown by a miniscule 0.2%, services have grown by 2.4%. This growth in services, however, is dependent on incomes created elsewhere in the economy.

So where is that elsewhere? It should be in the innovation and development of competitive products for both domestic and international consumption. Yet as noted, we’ve actually seen a decrease in this type of employment. And while Canada’s 600,000 manufacturing job losses pale in comparison to the 3 million lost south of the border, the (similar) trends experienced in both related to stagnant and declining real wages for most income earners and increasing income equality highlights the potential necessity of a strong (i.e. globally competitive) manufacturing sector to buttress high levels of employment and a relatively equal distribution of the proceeds of growth.  Our switch to services from production has indeed led to more growth, yet it’s done so in an increasingly unbalanced fashion.

And while resource income does provide Canada with a powerful income stream, it’s only as valuable as what we do with that income, and the concomitant shift to service related employment is not the answer. As the President of MIT recently noted in an op-ed to the New York Times, “Rebuilding our manufacturing capacity requires the demolition of the idea that the United States can thrive on its service sector alone. We need to create at least 20 million jobs in the next decade to offset the effects of the recession and to address our $500 billion trade deficit in manufactured goods. These problems are related, given that the service sector accounts for only 20 percent of world trade. To make our economy grow, sell more goods to the world and replenish the work force, we need to restore manufacturing — not the assembly-line jobs of the past, but the high-tech advanced manufacturing of the future.”

The US is far from alone in targeting this challenge. All Western economies will seek to do the same, as will developing economies that currently hold significant wage-related advantages.  Rebalancing a domestic economy in the face of this competition means hard-thinking on not just investment and innovation priorities, but also on wages and productivity and their relative global positioning, and the distribution of profits domestically that can counter the deflationary impacts of a more globally competitive wage structure.

Ultimately, the world’s changing and Canada can’t afford to sit back and assume that the geographic serendipity that endowed us with natural resources is enough to ensure that future generations of Canadians will enjoy the quality of life that we have.  We need a strategy to compete in a 21st century global economy that is dramatically different, and dramatically more competitive, from the past several decades of relative good times. The gradual introduction of millions to the skilled labour force across the emerging and developing world presents a significant challenge to now-orthodox conceptions of wages and incomes in the West. This isn’t about returning to low-value production of textiles and white goods. Rather it’s about competing in the next generation of technology and ensuring a domestic production base. Eventually, growth across the developing world may witness the development of a consumer base that absorbs production from higher-wage countries. However, as we’ve witnessed with China’s emergence, the creation of a broad domestic consumer base is a decades-long process. And in Canada, the US and other mature economies, we can’t wait decades to put people back to work in fulfilling and relatively well-valued work.