Province’s risky bet against natural resources | JDI Roundtable | UNB

Global Site Navigation (use tab and down arrow)

JDI Roundtable on Manufacturing Competitiveness in New Brunswick

Province’s risky bet against natural resources

Herb Emery

Ray Ivany, the former president of Acadia University, has recommended that New Brunswickers exploit higher-reward opportunities that come with higher risk.

There is a certain logic to this, supported by Thomas Piketty in his tome Capital in the Twenty-First Century. He notes that higher wealth is associated with higher-risk taking.

But what I think Ray Ivany should have said is that a region already addicted to economic gambling needs to place smarter bets. 

Lately, the language of risk-taking in our province has been associated with natural resource development - fracking and pipelines in particular. Opponents have argued that natural resource prices, and incomes from exports, are more volatile than those of many other sectors. Plus, natural resources are associated with environmental costs and environmental risks.

The story New Brunswickers have come to accept is that exploiting natural resources carries too high a risk, so we should look for other ways to make a living.

But is this an accurate description of these economic opportunities?

Almost a year ago, in a Telegraph-Journal op-ed piece, Professor Donald Savoie challenged opponents of resource exploitation to spell out their plan to grow the province’s economy if we aren’t going to exploit a longstanding comparative advantage in natural resources. 

It’s been a year and I have not seen Dr. Savoie’s challenge met, as there is no obvious alternative for growth in New Brunswick on the scale offered by natural resource production, forward processing and export. There is no obvious alternative that offers economic opportunity to both rural and urban New Brunswick. 

Let’s be clear: No one wants an economy solely reliant on natural export production. Rather, we want to use the wealth created from resource exports to spur the development of new industries and re-invigorate industries of traditional strength in New Brunswick, like manufacturing, to diversify the economy.

So what Mr. Ivany’s comments miss is that New Brunswickers have already taken an unprecedented gamble in choosing not to exploit the full potential of the province’s natural resources. In choosing to leave the wealth in the ground and rely on public spending and public entrepreneurship, financed by borrowing, the province is playing an annual game, akin to combining “Chase the Ace” and “Roll up the Rim to Win.”

Each year the ace is not drawn, we carry on as we are and roll up some more rims. But as the deck of cards shrinks, the ace that ends the game will not come with a prize, it will bring public sector austerity.

The only hope is that we roll up enough coffee rims before this occurs so the accumulation of free stuff, and maybe a big prize, lets us stop playing “Chase the Ace” before it’s too late.

If we are to be gamblers, then we need to understand the bet we are making. New Brunswick, with its slow growing economy and aging population, carries risks that many observers see as a path to economic disaster. By choosing to not exploit natural-resource export opportunities to generate growth, we are gambling that some other source of new income, including increased federal government transfers, will emerge. And there may be hope for the latter option after Prime Minister Justin Trudeau’s springtime advice to New Brunswick to “keep on spending.”

Maybe we will get a new industry larger than the forestry sector, larger than we historically had with mining. But maybe we won’t. 

Maybe the federal government will stop reducing the per capita value of federal transfers to New Brunswick or even provide transfers on the same per capita basis as Nova Scotia. But we may be betting on a Trudeau government re-election and enough economic success in Alberta that the federal government has money to send our way.

To understand the downside risk of not pursuing natural resource opportunities for growth, we need to understand the implications of a no-growth economy, should New Brunswick’s gamble - that something else will happen - not pay off.

Can you maintain the current standard of living in New Brunswick with an aging population and no growth in the economy? Can New Brunswick continue to redistribute income to support regional and cultural needs that the province values so highly? Can levels of public sector compensation remain where they are? Can New Brunswick protect its vulnerable citizens, as other budget priorities like medical treatment expenditures take a greater share of the budget? Will future Canadian and New Brunswick taxpayers agree to pay for the services we have promised ourselves if the economy continues to stagnate?

My point is not to criticize the province’s innovation agenda: to create startup firms and new industry for New Brunswick. That is a worthwhile effort. But the magnitude of success is uncertain, making this a bet, rather than a predictable outcome.

My point is that we should be doing this in addition to exploiting the province’s traditional comparative advantage in resource development and export. Why not orient the innovation agenda towards improving the competitiveness of our resource producers?

I want to object to the characterization of natural resource exploitation as economically risky. In terms of predictable creation of income and wealth, natural resource exports are not economically risky. Private sector investors are willing to accept the financial risks of resource projects so long as we offer them predictable policy environments around regulation and taxation. 

The risks of resource development are largely associated with government policy and regulation. If resource exploitation brings benefits, like employment and income, but also environmental costs, then has the crown owner of the resource done its job to ensure that for New Brunswickers the benefits outweigh the costs? Has the crown owner of the resource set policies to ensure that citizens get a “fair share” of the benefits of resource production? Has the crown owner established policies to ensure the benefits of resource exploitation last beyond the near term? 

Most importantly, has the government established the regulations necessary to protect the environment? Does the government have the credibility and the will to enforce these regulations?

The answers to these questions may be the path to resolving the social licence crisis that has led us to reject energy projects and to not promote the competitiveness of our resource-based industries. Social licence - effectively granting a political veto to a wide range of stakeholders - has led to the most audacious societal risktaking that we have seen for generations. 

Counter to Mr. Ivany’s claims, New Brunswickers have no problems taking risks. The problem may be more of understanding the risks and the stakes of the gambles they have chosen to take.

Herb Emery is a Brunswick News columnist and the Vaughan Chair in Regional Economics at the University of New Brunswick.

This article first appeared in Brunswick News publications – June 6, 2018

The JDI Roundtable on Manufacturing Competitiveness in New Brunswick is an independent research program made possible through the generosity of J.D. Irving, Ltd. The funding supports arms-length research conducted at UNB.