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JDI Roundtable on Manufacturing Competitiveness in New Brunswick

How can New Brunswick increase private investment? Looking to the past for answers 

By Sarah McRae

The Government of New Brunswick recently released its action plan to “ensure post-pandemic recovery and economic development in New Brunswick.” Among the government’s five priority areas was the goal to increase private sector investment. The action plan states that “over the next 10 - 20 years, with the right infrastructure, tax and policy environment, New Brunswick will become a natural magnet for investment.” It also sets the goal of lessening the province’s dependence on incentives to attract investment. It points out the public sector-led investment is not a sustainable source of growth and seeks to reverse a trend from the past decade in which the public sector has become the main driver of economic growth.  

So, what does it take to increase private sector investment? The action plan highlights a “pro-growth” agenda. Businesses consulted by the government said to make it easier for them to invest and to address the taxation and regulatory regime to ensure a stable, business-friendly climate to support long-term investment. The action plan aims to reduce regulatory burden on New Brunswick businesses by $14M by next year, but omits any other reference to specific levers to coax private sector investment. 

These are not new ideas – to get a sense of the impact of this kind of policy, it’s best to look back to the period before the 1960s, before new sources of federal funding like FRED and DREE changed the province’s approach to economic development to one focused on public sector driven investment. 

Has the province ever been a “natural magnet” for investment? 

The Atlantic Institute of Policy Research has been conducting a survey of NB economic plans from the past century to look for examples of policies that led to strong growth and high levels of investment. 

The main policy approaches for provincial economic development, broadly speaking, have been: 1) to rely on market forces to bring in new investment and to make policy decisions and infrastructure investments to foster a favourable business climate; or, 2) to actively guide the province towards new industries by targeting sectors that seem most promising and aggressively courting companies and/or investing in projects to bring new industry to the province. 

The latter strategy has dominated economic development strategies since around the 1960s, as part of a broader agenda of diversifying the province’s economic base away from natural resources. It was the strategy for filling industrial parks in the 1970s and 80s, and for bringing in a host of call centres in the 1990s. Examples of largescale private sector investment without financial incentives do exist, but we must look farther back, and we must look to natural resources.  

Before the 1960s, the government of New Brunswick followed an agenda of relying on natural resources to create wealth – specifically by attracting external capital and heavy industry based on processing and secondary manufacturing from its forests, minerals, agriculture and fisheries. The trend was to leverage resource and labour abundance based in the province for competitive advantage for exporters. Provincial governments drew on New Brunswick’s abundant labour, timber, mineral resources and seafood to create wealth, and government intervention focused on creating low cost energy inputs for production, and long-term predictability of business conditions for investors.  The location of investment and development was largely driven by the location of resource endowments. 

The general trend was to adapt policies to meet the demands of interests looking to locate and invest in the province. An important aspect of this approach was to use business-friendly resource policy to attract international producers to establish a presence in the province for their export-based industries. The establishment and growth of the pulp and paper sector in the province in the 1920s provides an illustrative case study of this strategy.

Attracting private investment without cash: pulp and paper in the 1920s 

New Brunswick’s economy has historically been reliant on its forest industries, starting with lumber and moving into pulp and paper in the late 19th century and expanding its footprint through most of the 20th century.  Bill Parenteau has called the rise of the pulp and paper industry in the 1920s “the most significant industrial development that would take place in the province in the 20th century.”1 

By the 1920s, the lumber barons that had dominated the economic (and political) landscape for generations had dropped from the scene. Although the lumber market had enjoyed a boom in the years immediately following WW1, the market’s collapse in 1921 left many sawmill operators with heavy debt and excess stock from over-speculation. Pulp and paper firms had established a presence in New Brunswick, but they were initially slow to develop production capacity, even after they had accumulated substantial Crown leases and waterpower rights.  

In these pre-WW2 years, it was not common practice for provincial governments to put cash on the table to incent private industry to locate in their jurisdiction. Eager to see the pulp and paper industry develop and replace the declining lumber industry, provincial governments of the period applied various other measures to spur development. These measures can be broadly grouped into two categories: policies aimed at forcing growth (such as minimum cutting requirements) by penalizing lack of industrial development, and policies and actions aimed at meeting the demands of pulp and paper promoters. Ultimately, the latter strategy would prove more effective, and the industry began a rapid expansion in the 1920s only after the Conservative government of James Baxter (1925-1931) granted the generous concessions demanded by the leading pulp and paper players. 

The development of the pulp and paper industry during the 1920s was largely guided by the needs of industry promoters – the provincial government’s participation in the negotiations mainly consisted of accommodating companies’ needs to secure investment.  Premier Baxter himself, presiding over the opening of International Paper’s Dalhousie mill in 1930, explained his government had attempted "to create conditions under which the investment of capital will be safe for the development of the opportunities the province affords."2 The Baxter government used the best strategy it had available, granting generous concessions and privileges in order to make the proposition of doing business in New Brunswick appealing. Specifically, developers required the government’s help in negotiating Crown leases, leading to the concentration of control over New Brunswick’s forest and water resources. The government also altered Crown land regulations to accommodate industry, including allowing for longer leases. These negotiations were followed by a period of rapid expansion in the late 1920s. After more than 20 years of holding substantial wood and power resources in reserve, International Paper began industrial development of an unprecedented scale in New Brunswick, including the Grand Falls power dam, which came online in 1928. The same year, it began construction of a large, $15-million newsprint mill in Dalhousie. When it was completed in 1931, the Dalhousie mill was one of the largest and most technologically efficient newsprint mills in the world. 

In less than 10 years, pulp and paper-making capacity in New Brunswick had increased several times. The pulp triumvirate controlled the province’s hydroelectric capacity as well as roughly 70 per cent of the industrial forest land under leases extending up to 50 years.  Compare this to present day industrial leases, which are issued for 20 years.3 

This is how the pulp and paper industry finally took hold in New Brunswick in the late 1920s with the full support of provincial government, which was now focused on granting the requests of industrialists to encourage them to ramp up production rather than attempting to strongarm them into producing.  

How does the province attract investment from non-resource industries? 

While the above example presents valuable lessons, attracting private investment to the province today is not as simple as applying a government strategy from 100 years ago. One challenge noted in the government’s consultations with the business community was that “changes in global market conditions and environmental concerns are forcing change in our traditional resource-based industries.” Volatile demand, regulatory uncertainty, and decreased social license for New Brunswick’s resource industries have prompted more recent provincial governments to look elsewhere for investment. 

Perhaps the most striking example of the latter approach is Liberal Premier Frank McKenna’s (1987-1997) approach to attracting a slew of call centres to the province in the 1990s. The “McKenna miracle” of the 1990s saw the government successfully sell the province’s best non-resource assets at the time:  a large, bilingual working age population willing to work for a lower wage, as well as an impressive telecoms infrastructure led by NBTel. The strategy drew call centres and other ICT firms to the province and helped Moncton become the Omaha of Canada. McKenna’s government also created “business-friendly” policies that proved controversial. In its promotional literature, the province boasted it could offer “the lowest legislated fringe benefit costs in North America for call centre operations,” citing the abolition of the provincial tax on all 1-800 numbers, the absence of a corporate capital or payroll tax, and the overhaul of the Workers Compensation Act, removing stress as a legitimate basis for a claim.4 On top of that, the government sweetened the deal with incentives to the tune of $10,000 in forgivable loans per full-time employee. 

What history has shown is that attracting investment comes down to building off natural competitive advantages, be they natural resources like forests or minerals, human resources like those leveraged in the McKenna years, or infrastructure like a competitive telecoms network or low-cost energy inputs. 

Now, as the government looks tighten its purse strings to meet its goal of reducing New Brunswick’s worrisome debt-load, the action plan moving forward is to attract investment with policy rather than dollars. That makes it especially important to assess our competitive advantages. We no longer have access to low-cost, abundant labour – in fact, private sector firms are sounding the alarm over labour shortages. The NBTel advantage is gone, and rising power rates have outpaced other jurisdictions. 

The pulp and paper example suggests that levers such as a tax policy and regulatory environment can help New Brunswick become an investment magnet, but this investment is likely to be in natural resource sectors – such as its forests, seafood, and swathes of unfarmed land – without a compelling advantage in one of the other areas of infrastructure, human resources, and government incentives.  

Dr. Sarah McRae is a postdoctoral fellow at the University of New Brunswick and a member of the JDI Roundtable research team.