Returning to Growth: Atlantic Canada, Government Spending, and Economic Growth

In “Disparaging Disparities in the Canadian Provinces,” I discussed some potential challenges facing the Maritime provinces–particularly dismal economic growth in recent years. More specifically, as argued by Fred McMahon in the AIMS publication Retreat from Growth, the Atlantic Provinces formerly experienced “revolutionary growth” in the 1960s and the regional economy has since declined precipitously. (Since the mid-2000s, Newfoundland and Labrador has seemingly reacquainted itself with the revolutionary growth outlined in McMahon’s book, easily becoming the “runaway leader in economic growth among all provinces.”)

Unlike other developed nations, wherein the evidence shows that poor jurisdictions seem to grow faster than their richer counterparts, Canada has witnessed an economic divergence across the provinces in these past few decades, which poses serious fiscal and economic challenges to the poorer provinces in Atlantic Canada. Despite Maritime Canada’s underwhelming economic record, however, the road to prosperity is still navigable. According to McMahon, for example, “The region was home to little more than a sixth of Canada’s population, but it boasted a quarter of the nation’s manufacturing enterprises, including both of its steel mills, six of twelve rolling mills, eight of twenty-three cotton mills, three of five sugar refineries, two of seven rope factories, and one of three glassworks.”

McMahon’s book made several pragmatic recommendations that would help provincial governments in the region boost their economies and many of those recommendations remain relevant today. One of his main recommendations was to encourage limited government intervention in the market, a recommendation that I will resurrect in this blog post.

There are several economic theories that explain what causes economic growth, but many of them do not necessarily explain the causal relationship. Daron Acemoglu, an MIT economist, along with two coauthors, has used an Instrumental Variable Method (IV) in their seminal paper, for example, “The Colonial Origins of Comparative Development,” to see whether an institution, geography, culture, or other factors–such as luck–causes economic growth. (Think of IV as the most accurate measurement of regression analysis, which eliminates omitted variables and accurately represents causal relationships.) The main finding is that “inclusive economic institutions,” i.e. those that feature secure property rights, law and order, competitive markets, and state support (public services and regulation) for markets; are open to relatively free entry of new businesses; uphold contracts; provide access to education and opportunity for the great majority of citizens; and is the primary driver of economic growth–not culture or geography, etc. These findings seemingly invalidate the antiquated belief that Atlantic Canada is an isolated region that requires additional government intervention to boost economic growth.

Correcting market failures is typically the reason for government intervention, but there is little evidence to suggest that this form of intervention is efficient or optimal. In fact, in “Economics Versus Politics: Pitfalls of Policy Advice,” Acemoglu and Robinson argue that the standard approach to economic policymaking might be incorrect because it ignores politics.

One important axiom from Milton Friedman is that “To judge policies and programs by their intentions, rather than their results,” is a “great mistake.” Perhaps politicians and policymakers have the right intentions, but the results are often less impressive, typically hindering the market, instead of promoting it. For Atlantic Canada, these policies have hindered economic growth, which affects residents of that particular region, but also the entire country.

McMahon argued in his book that a smaller and more efficient governance structure, in addition to lower levels of government consumption and competitive tax rates, is associated with economic growth. In Atlantic Canada, however, there are more public sector employees than the national average, for example, as AIMS reported in a recent study, “The Size and Cost of Atlantic Canada’s Public Sector.” Nova Scotia had 99 public sector employees per 1,000 residents in 2013–well above the national average of 84. Government consumption, therefore, is larger than in other provinces across Canada. Some folks believe that lower levels of taxation increase the wealth of private companies, but it is important to remember that these companies expend their profits, which expands the economy and creates additional employment opportunities. Moreover, McMahon argues that it is more efficient (and optimal) to use federal transfers as a means of lowering provincial tax rates, which would encourage regional economic activity while also constraining government spending.

Rinzin Ngodup is an AIMS on Campus Student Fellow who is pursuing a graduate degree in economics at Dalhousie University. The views expressed are the opinion of the author and not necessarily that of the Atlantic Institute for Market Studies

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