November 29, 2008

While Mineral Resources Boomed, Canada Partied

...and lost manufacturing jobs, narrowed economic base

by Jim Stanford

The Dominion - http://www.dominionpaper.ca

[cc 2.0] In the mining sector average real wages (adjusted for rising consumer prices) have actually declined by seven per cent since 2002 – a period of unprecedented corporate profitability. Photo: Dan Godin

Share

Del.icio

TORONTO, ONTARIO–We’ve all heard the story about the poor guy who won the lottery. He didn’t manage his new wealth very well: spending like a drunken sailor, giving it away to friends, sinking into debt. In the end, he said that winning the lottery was the worst thing that ever happened to him.

Canada is blessed with incredible resource and mineral wealth. For a country, it’s kind of like winning the lottery. What could be better than to find out that the stuff buried beneath our feet is worth untold billions or even trillions of dollars on inflated global commodity markets?

And that’s what it's felt like in the last few years. The global commodities boom began in earnest around 2003. And Canada was right in there, partying hard.

During the last five years, global prices for minerals and other resource commodities have soared, even while mining sector employees faced a decline in real wages. Profits of Canadian mining companies, petroleum giants, and other resource firms expanded to untold levels.

New investment and employment opportunities were created in some resource communities. Even governments rode a fiscal wave of new revenues thanks to the commodities boom – using their share of resource profits to finance new initiatives (including expensive corporate tax cuts, which disproportionately benefited the resource companies whose profits were already sky-high).

At the same time as the resource boom rolled on, however, there were some important, little-noticed structural changes occurring deeper down in Canada’s economy. We became significantly more dependent on the production and export of largely unprocessed natural resources (minerals, agricultural products, and especially energy) to pay our way in the economy, and in world trade. For example, unprocessed or barely processed resources now account for about 60 per cent of all our merchandise exports. Value-added merchandise (for which we process, manufacture, and add value to our resources) make up only 40 per cent. That’s a dramatic change from just 2000, when those ratios were reversed (value-added products were 60 per cent of our exports, and resources 40 per cent).

Directly and indirectly, therefore, the resource boom substantially narrowed Canada’s economic base.

Manufacturing has withered away, shedding over 400,000 jobs, hammered by the inflated value of our currency (which soared in line with oil prices and other commodity values). Other non-resource industries were also hurt by the overvalued loonie, including tourism and exportable services (like business services and transportation). Indeed, according to Statistics Canada data, our services trade deficit is now the worst ever. And excluding minerals and petroleum, Canada went from a $17 billion trade surplus in 2002, to a deficit that will exceed $30 billion this year. Unfortunately, it seems, we relied on the “easy” money provided by record commodity prices to subsidize the erosion of our trade performance in other, higher-technology industries.

Productivity was another casualty of the commodities boom. Productivity in the mining and energy sectors has declined (as companies chase increasingly marginal and hence expensive deposits), and the destruction of high-productivity manufacturing jobs has also hurt productivity badly. Statistics Canada reported recently that national productivity is now lower than it was at the beginning of January 2006 – ironically, when Stephen Harper’s petroleum-friendly government came to power. The commodities boom has thus been associated with the longest sustained productivity slide in our postwar history.

There have certainly been some trickle-down benefits from the resource boom. New jobs and incomes in mining and resource communities have been much-appreciated. Mining unions like the Canadian Auto Workers (CAW) have fought hard to ensure that resource workers get a decent share of the unprecedented wealth they are producing, and in some cases we made significant forward progress during the boom. Across the resource industry as a whole, however, the distribution of the windfall gains resulting from the commodities bubble was anything but fair.

The accompanying table summarizes the changes in several measures of corporate profitability and wages in the mining and petroleum industries in Canada during the boom. Corporate revenues soared, thanks to record global prices for oil and minerals. Operating profits more than doubled in the oil industry, and more than quadrupled in mining. Measured as a return on shareholders’ equity, profit rates more than doubled.

Wages grew, yes – but not dramatically. Average hourly wages are up just five per cent in mining, and 15 per cent in petroleum. And the high cost of living in booming resource communities has eaten up those gains. Incredibly, in the mining sector average real wages (adjusted for rising consumer prices) have actually declined by seven per cent since 2002 – a period of unprecedented corporate profitability.

To be sure, Canada is blessed with abundant resource wealth. But we have clear choices regarding how to make the most of that wealth. We don’t want to end up like that poor fellow who now wishes he’d never won the lottery. In recent years we’ve had a helter-skelter approach to managing the boom, throwing caution to the wind; companies fell over each other to extract and export as much resource wealth as they could, while the getting was good.

We even allowed foreign companies to grab much of the pie. Canada is the only major petroleum- and mineral-exporting country in the world that imposes virtually no limits on foreign ownership of our non-renewable resource base. No wonder, then, that foreigners came rushing in for a piece of this super-profitable action. Over $200 billion in new foreign investment flowed into Canada during 2006 and 2007 alone (almost all of it to take over existing companies, rather than building new ones – and most of it in the resource sector). This inflow of hot foreign money accentuated the unsustainable run-up in the loonie, which did so much damage to the rest of our economy.

In short, during this boom, big money flowed fast and furious – for a while. But now the commodities bubble has clearly burst, and the boom is coming to an end. Global financial instability and the prospect of a recession in the US and other countries has suddenly knocked the stuffing out of resource prices (and our dollar). It turned out that putting all our eggs in the resource basket, and not worrying about extracting maximum value-added from those resources, may not have been the best economic strategy for the long-term, after all.

Did we make the most of our non-renewable wealth? Or were we obsessed with short-term profits, ignoring the state of our true fundamentals: our technology, our productivity, and our capacity to add value to our resources through our work and our ingenuity?

A better approach is to use our resource wealth carefully, as a strategic asset. Foster resource development, yes – but with strings attached. We should require the use of Canadian-made inputs and services to mining, and the made-in-Canada downstream processing and manufacturing of our own resources. Attaching performance requirements to foreign takeovers (regarding Canadian value-added commitments) would also help. Our currency should be deliberately managed (through lower interest rates and restrictions on foreign investment) to prevent a resource boom from squeezing out other valuable export industries. There should also be binding mechanisms through which mining companies are regulated to ensure that they are not abusing workers or the environment.

Canada partied hard while the commodities boom lasted. Now we’re likely to be stuck with a national hangover, reflected in our backsliding on productivity and non-resource exports, and the plunging value of Canada’s resource-heavy stock market. Let’s see if we can learn our lesson. Next time global commodities markets catch fire, let’s be a little more careful and deliberate about jumping into the flames. Let’s use our fortunate legacy of resource wealth to build a more diversified, value-added economy – one that can prosper long after the resources are gone.

Jim Stanford is economist with the Canadian Auto Workers, and an economics columnist for the Globe and Mail. He is author of the new book, Economics for Everyone.

Comments