Derailing Economic Growth on Cape Breton Island

In a quote that could be easily mistaken for a passage from Ayn Rand’s Atlas Shrugged, Cape Breton Regional Municipality (CBRM) Mayor Cecil Clarke said of the St. Peter’s-Sydney line closure, that “The wider economics of Nova Scotia and Cape Breton Island are larger than those of the shareholding interests right now of Genesee & Wyoming.” Politicizing economic development, as has been done in Cape Breton, is a slippery slope and the millions in financial support from federal, provincial, and municipal governments to keep the Sydney Steel Plant afloat is evidence.

Genesee & Wyoming, a short-line railroad holding company based in Connecticut, decided to close the St. Peter’s-Sydney portion of the Truro-Sydney rail line, which moves more than 22,000 cars annually, transporting paper, coal, lumber, petroleum products, and chemicals. Since 2003, business has declined threefold, despite that company receiving a $20.6 million subsidy to provide services to customers on the Island. The latest rate hike increased prices by more than 300 per cent and left the company with only three customers. Michel Huart, Genesee & Wyoming’s legal counsel, has told the Nova Scotia Utility and Review Board that prices were likely to increase again in 2015 if the company operates that line.

CBRM, the Cape Breton Student’s Union, Sydney and Area Chamber of Commerce, and Cape Breton Partnership are lobbying for the railway to continue operations, arguing that it is crucial to existing customers and necessary to develop the Sydney port.

In a market economy, businesses respond to incentives and invest where there is an opportunity for growth. The companies responsible for operating the St. Peter’s-Sydney section of the rail line, however, have received $20.3 million for offering their services to local companies. Yet, despite this subsidy, Genesee & Wyoming would rather shut down the line east of St. Peter’s junction. If a company literally refused to take free money to continue operating that line, the benefits of doing so must be very small, if there are any.  Elected officials in Cape Breton, in addition to the business community there, would like the line to remain ere it is because it provides jobs, easy access to raw materials, and the three remaining customers would have logistical challenges receiving cargo via transport truck. They also argue that it is vital to the development of Cape Breton, particularly because of the Sydney port.

CBRM received government funding to dredge the harbour in 2012 and ostensibly, all that is left is building a container terminal in the Sydney port. The federal and provincial governments, in addition to private investors, have not been eager about the project, however, and the lack of potential customers has some people very concerned about the future of it. According to city councillors and business owners, the problem is that Genesee & Wyoming are shutting down a rail line that operates roughly one train per day and is in need of upwards of hundreds of millions to meet the capacity of larger container ships: without this line, the port will never be developed and Cape Breton will miss out on a great opportunity–or so they say.

This situation is the same we face every few years, but with different actors. Fundamentally, the community has the cause and effect backwards: economic growth comes before economic development, not the other way around. Time, and time again, we call for the government to dredge our harbour, save our railway, build a container terminal, subsidize the steel plant, and the list goes on.

It is nearly impossible to place economic development before growth, particularly because of the risk involved with investing in a community without medium or long-term prospects for growth. There is a reason why the only “big jobs” in Cape Breton are government jobs: private companies do not want to invest in a hostile climate suffocated by government regulation. Imagine the reaction of high-level managers from companies around the world when a company decides to stop operating a rail line that has three customers, even though they received $20.3 million in subsidies.

Nova Scotia, and more broadly, Atlantic Canada, must begin promoting growth before development. Approving the Donkin mine project, fracking operations, and other natural resource extraction is a step in that direction and creating a policy framework that encourages manufacturers to build plants on Cape Breton Island is another. In fact, the CBRM could have approved the operations of an iron pellet plant, creating roughly 500 jobs, but opted, instead, to create Open Hearth Park.

The closure of the St. Peter’s Junction is not about developing the port or the loss of easy transportation, it is a symbol of Cape Breton’s mentality: build it, have the government fund it, and the economic benefits will follow. It is time that our politicians and business owners rethink their relationship with economic development as something that is earned, not bought. Smart decisions will almost always ensure economic development–it is when smart decisions are not working when, perhaps, the government should take a larger role in economic development. But it must stop considering economic development as the end goal: while it is unequivocally beneficial, having a railroad for the sake of having a railroad, particularly because “Halifax has a railroad,” is not conducive to building a productive economy. CBRM’s end goal should be to increase material wealth and wellbeing.

Until the CBRM can better understand the cause and effect relationship between economic growth and economic development, it will remain trapped in a vicious cycle of economic decline.

Corey Schruder is an AIMS on Campus Student Fellow who is pursuing an undergraduate degree in history at Cape Breton University. The views expressed are the opinion of the author and not necessarily that of the Atlantic Institute for Market Studies

Disparaging Disparities in the Canadian Provinces

The OECD Economic Survey 2014 indicates that Canada experienced solid economic growth in recent years, despite the recession in 2008. Estimates show that Canada’s GDP will grow between 2.5 to 2.7 per cent in 2015, for instance, which is a welcome sign for the Canadian economy. A country’s overall economic performance, however, does not reflect regional economic performance. In Canada, although the economy has been performing well nationally, the regional economic outlook is a different story–one of divergence across provinces.

In the last few decades, intraregional economic disparities have widened in OECD countries and the 2008 recession seems to have exacerbated them. According to the OECD regional outlook, for instance, Canada has the 3rd largest regional economic disparities in the OECD since 2010. There are many studies, however, that rely heavily on the standard neoclassical growth model. Serge Coulombe and his colleague observed a decline in Canadian regional disparities, citing an “economic convergence phenomenon.”

In neoclassical growth theory, the term “economic convergence” typically means a decline in economic disparities between regions on account of poorer economies growing faster than richer ones. Evan Capeluck, in “Convergence Across Provincial Economies in Canada: Trends, Drivers, and Implications,” employed 25 economic variables to measure whether poorer provinces are catching up economically with their richer counterparts, which neoclassical economists theorize. Capeluck concluded that, in the long run, the ten Canadian provinces did experience economic convergence, but he indicated that “… there was divergence in economic variables related to income, productivity, and fiscal capacity.”

As shown in the chart below, with the exception of a few oil producing provinces, economic growth in most provinces grew less than the national average in 2013. Nova Scotia’s GDP, for instance, has grown slower than the national average for roughly two decades. In fact, in recent years, Atlantic Canada has experienced a significant outmigration of younger individuals and families, which not only affects the labour force, but also human capital–two of the most important determinants of economic growth.

The widening gap in economic performance across provinces is a serious threat to struggling provinces, such as those in Maritime Canada, where in recent years equalization payments from the federal government have declined as a share of GDP, due primarily to Ontario’s becoming a “have-not province.” This decline poses some economic and fiscal challenges to New Brunswick, Nova Scotia, and Prince Edward Island and these challenges may persist if Ontario’s economy continues to underperform. Equalization payments, and more broadly, federal transfers, comprise a significant share of Maritime Canada’s GDP. In fact, these provinces rely on federal transfers as a fairly substantial source of revenue and a small reduction in the share of equalization payments to those jurisdictions has a substantial impact.

Notwithstanding those developments that pertain to Canada’s equalization programme, the biggest obstacle facing the Maritime region is economic growth. Provincial governments in Maritime Canada should simplify the tax system, streamline regulations, and create an economic environment conducive to growth. Adopting more efficient policies that encourage competition is a good start.

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

Atlantic Canada must make tough energy decisions

Over the course of the past decade, energy issues have become louder and louder in Atlantic Canada; today, energy policy has recently often been the single biggest file for governments in the region. With the Muskrat Falls megaproject, shale gas exploration, and the Energy East pipeline have come a number of decisions Easterners must make—these decisions will play a large part in shaping the region’s economic future.

Let’s first examine the Lower Churchill Project. The project is often simply referred to as “Muskrat Falls,” the waterfall that is being developed for electiricty generation. Muskrat Falls will be owned by Nalcor, which the NL government created in 2007 as a publically-owned electricity-market monopolist. Through its subsidiary NL Hydro, Nalcor has the sole right to supply and sell electricity in the province. And despite the fact that government’s Lower Churchill development plan includes the construction of a Maritime link that connects NL’s electric grid to the mainland’s without passing through Quebec, the NL government has severely restricted interprovincial trade.

By denying Newfoundlanders and Labradorians other electricity options, the province’s government has given Nalcor the power to raise its rates at a whim. This power allows for the construction of the Muskrat Falls project, which will cost $7.7-billion.Without its monopoly, Nalcor would not be able to pay for the project: many economists think the project in uneconomical. In fact, NL’s Public Utilities Board (PUB) could not conclude that the project was the province’s least-cost energy option, stating that there were “gaps in Nalcor’s information and analysis.”

Because of the project’s high costs, the NL government will have to borrow $5-billion—that is, nearly $10,000 for each of its of its residents. With these potential consequences for the both the province’s debt and its electrical rates and output, the NL government’s management of Muskrat Falls will have serious ramifications for the province far into the future.

Muskrat Falls also has ramifications for Nova Scotian energy markets. Emera, Nova Scotia’s publically traded energy corporation will cover 20 per cent of the Maritime link’s cost in exchange for 20 per cent of the electricity produced at Muskrat Falls. Further, Nalcor will be able to use Emera’s transmission rights to sell electricity in the Maritimes and New England.

New Brunswick (NB) faces an equally dramatic energy situation. Two issues dominate energy discussions in the province: hydraulic fracturing (or fracking) and TransCanada’s Energy East pipeline. Tests for shale gas, which NB Premier David Alward hopes will be extracted through fracking, have prompted locals to (often violently) protest. Fiscally, however, potential fracking revenues seem to be the NB government’s only way to pay for its current level of services without raising taxes or adding to the provincial debt, which is approaching $12-billion.

Although New Brunswick’s fracking debate has been Atlantic Canada’s loudest, shale-gas extraction proposals have also provoked argument in NL and Nova Scotia. Recently, the NL government imposed a moratorium on fracking until it has consulted the public and conducted reviews. Nova Scotia has had a fracking moratorium for about two years, though it is set to expire this summer.

New Brunswick can also expect to benefit from the construction of the Energy East pipeline, which will bring Albertan oil to Saint John’s Irving Oil refinery. The most noticeable gains from project will take place during its development and construction: a report by Deloitte found that the pipeline will boost New Brunswick’s GDP by $1.1-billion in this period. And during its 40-year operations phase, the pipeline project will add $1.6-billion to the province’s economy, though it will only directly create 121 permanent jobs.

With Muskrat Falls, NL is taking a significant fiscal risk and trapping consumers with the hope of becoming an energy power. Any jurisdiction that allows fracking must balance the benefits of increased economic activity and royalties with potential environmental harm and local frustrations. And the Energy East pipeline could give NB the sort of economic and fiscal boost it needs. Energy may enrich Atlantic Canada, but squandering it may breed regret.

Michael Sullivan is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute