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The 9 Habits of Highly Effective Resource Economies

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Executive Summary

Hewers of wood and drawers of water have had a bad image since Joshua cursed the Gibeonites and condemned them to those labours. Some of that biblical taint lingers in Canada. Fur, fish, wood, and minerals may have shaped this country, but for much of the 20th century, natural resources were largely regarded as part of the old economy, best left behind as Canada raced toward a glittery high-tech future.

That future did not arrive. Instead, the global commodity boom that began in 2003, fuelled by industrialization and urbanization in emerging economies, made the resource sectors important again.

Last year, the top Canadian merchandise export to every one of its major trading partners was a natural resource. This unexpected revival of the resource economy is one reason governments in Canada have come late to the realization that they must be more deliberate and united in their approach to resource development if they are to spread the wealth, not just over regions but also over generations.

Although the current boom looks likely to continue for some time, it will inevitably turn into bust, taking with it the impetus to design Canadian resource policy for the long term. The result will be that when the next boom arrives, we will be equally unprepared. Producers of energy, minerals, and forest products are feeling the tug of global demand today. Agriculture and water will feel it tomorrow, as the global middle class rises to a mind-boggling 3.2 billion people in 2020 from 1.8 billion now. Resource development in the Arctic brings with it another set of challenges that demand a new approach.

This report set out to find the basket of issues that should be addressed now if Canada is to have a proactive rather than reactive resource policy. The nine recommendations reflect the issues raised most often in more than 160 conversations held with representatives of government, industry, and academia in Canada, as well as in Australia, Chile, Finland, Norway, Sweden, and Britain. Norway is often held up as an exemplar, but no one country offers a model Canada could adopt in its entirety. Still, Canada’s resource peers offer lessons that too often are overlooked in our domestic debate, which is narrow, partisan, frequently uninformed, and almost entirely focused on the Alberta oilsands. “We’ve been handed the golden goose and we squabble over it,” says John Hancock, a counsellor at the World Trade Organization.

Those squabbles have ranged from inter-governmental spats over revenues to whether high resource prices are good for Canada. In a September 2012 speech in Calgary, Mark Carney, governor of the

Bank of Canada, emphatically stated that high commodity prices are “unambiguously good for Canada.” But he added some important advice that lies in with the content of this report: “Rather than debate their utility we should focus on how we can minimize the pain of the inevitable adjustment and maximize the benefits of our resource economy for all Canadians.”

The sky will not fall if Canada continues its current ad hoc approach to resource development policy in its broadest sense. But without strong leadership and collaboration we risk losing an opportunity to become a real resource superpower, one capable of responsible and efficient stewardship that Canadians can be proud of and other countries will want to emulate.

Picture 1 of 10

Every province and territory, except for Prince Edward Island, has either mining, energy, or forest production and sometimes all three. P.E.I. is rich in farmland, which is of increasing global importance.

Recommendation #1

Governments must demonstrate that they are responsible stewards of public money. All levels of government in Canada with revenues from non-renewable resources should stop treating them as income to be spent and start treating them as capital to be saved or invested. Each province or territory receiving revenues from non-renewable resources should establish (if they do not have one already) provincial wealth funds. The federal government should do the same for the non-renewable resource revenues it receives from the territories and should investigate the possibility of putting corporate income tax revenues directly related to non-renewable resources into a fund. Treating resource revenues this way has implications far beyond the fiscal. It could potentially lessen currency volatility due to commodity price movements, help stabilize the economy through booms and busts, simplify equalization, and provide a source of investment income over the long term.

Recommendation #2

‘How do we do more with what we’ve got?’ should be the focus of government policy on natural resources. While it’s up to business to find the answers, government’s role is to provide a solid foundation through modern infrastructure, education and research systems. An additional role for government is to ensure that its policies do not hinder the growth of value-added industries.

Recommendation #3

If Canada wants to stop being only a hewer of wood and drawer of water and add, extract, or build more value around its natural resources, it must do a better job of collaborative research involving government, academe, and industry. To do this, federal and provincial governments must concentrate their funding for research and development on collaborative projects between groups of companies and academic institutions, borrowing the best ideas from existing models in Australia, Finland, and Chile, among others. Small-scale efforts such as the Centre for Mining Innovation in Canada, FPInnovations, and the Canadian Oil Sands Innovation Alliance provide templates for broader, national efforts.

Recommendation #4

Canada should bring in a national, revenue-neutral carbon tax. We should not wait for the United States to act, but move ahead with a plan that includes border measures to ensure Canadian companies are not put at a competitive disadvantage. This will not only create more certainty for Canadian businesses but will give them the incentive they need to develop the greener products and processes that are increasingly in demand in much of the rest of the world. This should be done in consultation and co-operation with business and the provinces.

Recommendation #5

Canada should mount a sustained effort to diversify its trade and investment, building on its success in the U.S. market to become a more global trader. This means addressing not just trade policy but also policies that have an impact on the size and competitiveness of Canadian firms. In the absence of progress in the multilateral trade talks through the World Trade Organization, Canada should focus on negotiations involving the largest possible number of countries, such as the Trans-Pacific Partnership, and look beyond China so we do not repeat the error of putting all our eggs in one basket. Government can help companies plug into global value chains by removing impediments and securing the right trade and investment deals.

Recommendation #6

Resource companies operate in global industries. To be competitive, we need companies that are or can become global players. Governments need to change laws that impede the emergence of global players, especially securities laws. Imposing arbitrary limits on foreign investment would likely hurt our resource companies by increasing the risk of retaliation abroad and discouraging foreign investment in Canada. Not all foreign investments are welcome, especially if the investors do not operate on a commercial basis or Canadians do not receive reciprocal treatment in their market. But when potential investments are refused, the reasons should be public and transparent.

Recommendation #7

Canada should bring coherence and focus to its resource-related aid and maximize its impact through collaboration with other resource-rich donors, such as Norway and Australia. The focus should be on poverty alleviation through strengthened resource governance in the recipient country. In order to practise what it preaches, Canada should implement the Extractive Industries Transparency Initiative.

Recommendation #8

The overuse of temporary workers has negative long-term consequences and does not attack the root cause of skills shortages, many of which are domestic in origin. A long-term solution includes better coordination between education systems and industry, stronger outreach to aboriginal Canadians and women, and welcoming immigrants as permanent residents, who will continue to contribute to society, rather than as temporary workers.

Recommendation #9

Canada needs a national plan that will tie together efforts being made to develop its natural resources. The ultimate goal should be long-term, sustainable benefits for the whole country. The federal, provincial, and territorial governments should collaborate on a national blueprint for resource development that identifies the gaps to be filled — including in infrastructure, environmental protection, trade diversification, education and immigration, technology, and supporting sectors — and sets out how to address them, with achievable goals and deadlines. The federal government should convene and lead, but not dominate, the discussion.

 

The Author

Madelaine Drohan is the Canada correspondent for The Economist and contributes regularly to its sister company, the Economist Intelligence Unit. For the last 35 years, she has covered business and politics in Canada, Europe, Africa and Asia. She has written in the past for The Financial Times (UK), appeared as a commentator on BBC Radio (UK), ABC Radio (Australia) and CBC Radio, and worked in Canada for The Globe and Mail, The Financial Post, Maclean’s, and The Canadian Press.