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

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

An Economic Exploration of Bilingualism, Part One

As an Anglo resident of Montreal, I have gotten to know the city in my three years here as a student. Known as the “cultural capital” of Canada, Montreal is one of the most diverse metropolises in the world. The city has a rather complex demographic history, largely with Anglophone and Francophone residents sharing the island-city through most of its existence. Power and influence has shifted between the English and French since the colonial era, with the Anglophones occupying the business and social elite until a massive cultural shift–the Révolution Tranquille–resulted in the Francophonization of Quebec in the 1960s and 1970s. Today, roughly 60 per cent of Montrealers are native Francophone; Anglophone Montrealers constitute a mere 13 per cent.

Despite these shifts, Montreal is a shining example of bilingualism: Anglophone residents are 80 per cent bilingual and their Francophone counterparts are 51 per cent bilingual. Overall, Montreal is 52 per cent bilingual–the highest rate in Canada.

Economics is the primary driver of the phenomenon: actors make decisions based on perceived value.

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In 1993, Jeffrey Church and Ian King constructed a simple model of the economics of bilingualism, which led them to conclude that network externalities and the cost of learning a new language made it more efficient for a linguistic minority to become bilingual. This model suggests that it is more efficient for Anglophone Montrealers to learn French than it is for their Francophone counterparts to learn English. Unsurprisingly, the number of bilingual Anglophone Montrealers exceeds that of bilingual Francophone residents by a sizable margin. Many Montrealers are bilingual, however, despite one’s origin and considering over half of Francophones identify as bilingual–especially younger Francophone individuals–there must be an omitted variable.

A study published by the London School of Economics and Political Science in 2012 notes that Anglophones in French-majority cities assimilate less than Francophone individuals in English-majority cities, which may provide some insight into language diversity in Montreal. English is the lingua franca of the world, for example, and although Francophone residents can sustain themselves in Montreal using solely the French language, the economic incentive to learn English is substantial, especially for those with career prospects abroad. Bilingualism, however, is becoming a standard requirement for obtaining employment in Montreal’s service sector. Moreover, both English and French speaking Montrealers have a variety of incentives to adopt bilingualism and Quebec’s education system makes learning either language quite easy.

In essence, Church and King’s model explains why it is more efficient for Anglophone Montrealers to learn French, whereas the interconnectedness of Montreal with the English-speaking world creates an incentive for Francophone Montrealers to learn English. Alternatively, Montreal’s role as an economic hub that connects to the English-speaking world is a primary driver of the city’s unique bilingual nature: economic incentives outweigh cultural sentimentality.

Montreal has developed a cosmopolitan culture unlike the rest of Quebec, which enhances its standing as a multicultural hub and economic nexus. It certainly should stay that way.

Leo Plumer is an AIMS on Campus Student Fellow who is pursuing an undergraduate degree in economics and political science at McGill University. The views expressed are the opinion of the author and not necessarily that of the Atlantic Institute for Market Studies