Mining News

Debunking the myths about Canada’s Resource Development

Posted by Alana Wilson on 6/24/2013 10:49:45 AM

By Peter J. Muench

Concerns over Canada’s reliance on natural resources for development are overblown, according to a new study by the Macdonald-Laurier Institute. The paper addresses the misplaced notion of a "resource curse" by correcting six commonly held misconceptions about the development of Canada’s natural resources.

Myth 1: The price of natural resources lags the price of Canada’s imports, slowing our long-term income growth.
Research in the 1950’s suggested that the price of commodities would fall in the long run compared to manufacturing. This led to the conclusion that any country that primarily exported commodities would see their terms of trade, the ratio of the prices of exports to imports, fall over the long term. Put simply, terms of trade is a way of measuring the effect of trade on the purchasing power of Canada’s domestic income: if the prices of imports rise (or the prices of exports fall), the amount that one Canadian dollar can buy in global markets falls. As a result, development economists have frequently warned that Canada’s commodity-dominated export sector would eventually lead to a reduction in terms of trade, and stagnating income growth.

However, this proved wrong, as terms of trade has nearly doubled in the eight decades following Confederation according to a 2010 Statistics Canada study[1]. Since 1870, Canada’s terms of trade adjusted GDP has risen by 18%, an increase “directly linked to the relative price of resources.”

Myth 2: Demand for natural resources is excessively cyclical, injecting unwanted instability into the economy
Natural resources are often accused of being prohibitively volatile and a major source of cyclicality in the economy. However, singling out natural resources unfairly ignores the fact that manufacturing and construction are historically the most cyclical sectors of the Canadian economy[2]. Resource projects entail large start-up costs and small costs of continued operation, meaning that the impact of fluctuations falls on prices and profits rather than output, increasingly stability. The opposite is true of manufacturing, where jobs and output bear nearly all the brunt of downturns.

Myth 3: Canada exports raw materials and imports finished goods, and the gap is widening
This is another argument that fails to hold weight when viewed against the empirical evidence. Imports of natural resources are the fastest growing section of Canada’s total imports. On the export side, Canada has trended inexorably away from its near reliance on natural resources and now boasts its most varied export base ever, with no product accounting for more than 25% of total exports.

Myth 4: Natural resources are the leading source of regional inequality in Canada
The difference in unemployment rates across Canada has fallen to the lowest levels ever during the commodity boom. All provinces have a sizeable resource sector that they have used to substantially boost growth. Notably, Newfoundland and Saskatchewan, two chronic laggards in economic growth, have seen incomes surge to levels that rival Alberta as a result of the resource boom.

Myth 5: Natural resources are technologically primitive, slowing innovation in Canada’s economy
The image of natural resource industries as primitive and low-tech is misplaced. Some of the world’s most technical and sophisticated equipment is used in the resource sector, which boasts six of the 32 top-ranked industries in terms of the number of knowledge workers[3].

Myth 6: The development of Canada’s natural resource industries hampers growth in other industries, notably manufacturing
In the 1990’s manufacturing growth poached away the capital and labour invested in resources, which set the stage for the current resource sector shortages. Between 2002 and 2008, there was a reallocation of capital and labour back to the resource industry at the expense of manufacturing. Since 2009, both sectors have grown together, reducing Canada’s dependence on any one industry type.

Resources are a friend, not a foe, to other industries
Natural resources in Canada have an image problem that stems from a number of widely held myths. The MLI paper corrects six of these myths and shows that resources should not be viewed as the enemy of other industries. In the 1990’s, manufacturing dominated at the expense of investment in commodities. Conversely, between 2002 and 2008, resources recovered and manufacturing struggled. This waxing and waning of the two industries should serve as a lesson: to aggressively disparage resources for slow manufacturing growth would lead to the same underinvestment that saw the resource sector stagnate through much of the 90’s. Rather, the current strong growth of both sectors suggests that they can, and should be encouraged to, thrive together.

The full paper can be read here.


Show References

References

[1] J. Baldwin and R. Macdonald, Natural Resources, the Terms of Trade, and Real Income Growth in Canada, 1870 to 2010.Statistics Canada Catalogue no. 11F0027M No. 079, p. 7
[2]Annual GDP in the construction and manufacturing sectors falls roughly 4 times more during recessions than in the natural resource sector.
[3]D. Beckstead and G. Gellatly. "Are Knowledge Workers Found Only in High-technology Industries?" Statistics Canada Catalogue no. 11 -622-MIE-No.005
 




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