Is Newfoundland a Petrostate? Part Two

It is instructive to use gross domestic product (GDP) as a means of evaluating whether Newfoundland and Labrador (NL) has become a rentier state. Let us compare across countries with firmly established rentier economies and analyze what share of GDP oil development constitutes: Saudi Arabia and Oman with 55 and 42 per cent, Venezuela at roughly 30 per cent, and Russia with close to 20 per cent. In NL, oil production accounts for 37 per cent of GDP. One additional characteristic of rentier economies is the small proportion of the labour force involved in the rent-generating industry, which, in NL, accounts for 5.4 per cent of all jobs.

Revenue derived from a particular rent-generating industry is another metric that one might use to analyze whether rentierisme has afflicted a particular jurisdiction: rentier governments depend heavily on resource revenues to fund programs and institutions. Indeed, the rapid influx of revenue from the rent-generating industry often encourages governments to adopt generous policy platforms. In the four rentier economies listed above, oil royalties as a share of total government revenue is 93, 45, 45, and 52 per cent, respectively. In NL, the provincial government derives 37 per cent of its revenue from oil royalties, reflecting the provincial government’s dependence on natural resource royalties.

These metrics seem to suggest that NL has become a rentier state, however, there are other elements that help determine whether that is the case.

The most common economic phenomenon associated with rentierisme is the deleterious “Dutch Disease,” which I described in an earlier blog post about NL’s experience with resource extraction. According to Kimble Ainslie, however, NL is not necessarily experiencing a “crowding out” of other industries or a decline in manufacturing employment. “Dutch Disease” typically occurs in an economy with a large non-resource sector, but NL’s agricultural and manufacturing industries are relatively small, and much too small in scale to export in significant quantities. (Non-resource sectors in NL account for 15.7 per cent of all provincial exports and 3 per cent of GDP.) Nevertheless, one could argue that NL’s persistent dependence on singular, direct sources of rent has suppressed non-resource growth in the first place.

If NL is suffering not from “Dutch Disease,” it could be suffering from a “resource curse,”–chronic political underdevelopment and corruption associated with resource dependency–which has retarded the province’s political environment over the years. Although the “resource curse” typically affects poor, developing countries, some aspects of it appear in NL. One consequence of lucrative resource rents, for example, is excessive, irresponsible government spending and NL is no exception: government after government in the province is guilty of increased spending habits and expensive social programs, not to mention public sector wage increases, etc. Furthermore, rentier states will earmark large, often dubious, public projects (read: Muskrat Falls).

Crowd-pleasing spending policies are commonplace in populist, single-party resource-rich states. Although a far cry from the petro-populism of Venezuela, the continuous rule of the NL Progressive Conservative Party, whose electoral victory roughly coincides with the beginning of the province’s oil boom, is intriguing. According to Reid and Collins, for example, former Premier Danny Williams used the oil issue in NL for political grandstanding and the demonization of his opponents.

Further to the aforementioned aspects of rentierisme, the most important long-term consequence of a rentier economy is a lack of incentive for diversification and long-term thinking, both of which result in economic vulnerability. Many Gulf countries have found it difficult to diversify away from the oil and gas industry, and with dwindling supplies in many of these states, in addition to the plummeting price of oil, the future looks grim. Thankfully, NL is less dependent on oil revenues, but, in the words of Finance Minister Ross Wiseman, recent budget shortfalls have one reason “… and that reason is oil.” Moreover, the provincial government has paid little attention to establishing a sturdier, more diversified source of revenue and it has had to make serious spending cutbacks.

In essence, although NL is heavily dependent on oil, and historically, single sources of revenue, it is not quite a textbook petrostate. The share of revenue and GDP resulting from resource rents is very high, but the effects of “Dutch Disease,” high levels of corruption and (serious) mismanagement, dysfunctional or authoritarian politics, and other ills commonly found in less-developed countries are less apparent.

Yet, the provincial government walks a fine line. The economy, albeit growing, does not seem to be diversifying. In addition, spending fell to reflecting falling oil prices, but per capita public debt remains the highest in Atlantic Canada, and as soon as rents begin flowing anew, spending will likely rise. In that case, and if government fails to encourage economic diversification–thereby continuing to place all of its proverbial eggs into one oil-slicked basket–the provincial economy faces the serious risk of economic decline.

As a matter of common economic sense, establishing a form of sovereign wealth fund (SWF) would benefit the provincial government in NL, and most importantly, the taxpayers who reside there. Liberalizing certain industries would also help them diversify and a more reserved approach to the oil and gas industry would eliminate the excessive emphasis on offshore oil. Finally, and perhaps most importantly, fiscal discipline is necessary and the provincial government must adopt measures that embrace it.

The future of NL’s aging population, and the younger generation there to support them, depends on the long term sustainability of NL’s economy. There is a lot to learn from the experiences of other countries with undiversified economies and the provincial government should take them seriously.

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

On Rural Newfoundland: Community Resettlement and Taxpayer Equity

Newfoundland and Labrador (NL) faces unique policy challenges due to the Island’s vast physical geography. Unlike the other provinces in Atlantic Canada, NL has a low population density, with 370,510 square kilometers of land for little more than a half million people. Further, a majority (51 per cent) of the population live outside of census metropolitan areas, with many living in rural or remote communities, some with a recorded population as low as five and reachable only by daily ferry service. While NL’s geographic makeup has created an interesting cultural element for Canada’s most eastern province, it has also created difficulties for the provincial government to ensure services are delivered efficiently to these rural communities. As a result, it is important to consider existing policies put in place by the provincial government that address these difficulties and whether they have been successful. Specifically, it is important to consider perhaps the most controversial policy in the history of provincial-municipal affairs: community relocation.

The provincial government adopted community resettlement policies between 1954 and 1975 in an effort to centralize the province’s population into government directed “growth areas.” In doing so, the government wished to ensure that all residents of the province had access to a reasonable level of government services, which could be achieved through less expensive means, while also encouraging innovation in the province’s economy through reforms to the provincial fishery. The government would provide financial assistance to families prepared to resettle. Initially, this project was a success, as 300 remote communities were abandoned and over 30,000 people resettled. However, the policy became politically unpopular, due in part to the absence of many promised economic reforms and, therefore, led to the end government-initiated resettlement.

Presently, the resettlement policy has been reformed into the current Community Relocation Policy, which is “community-initiated and community-driven.” Communities can apply for community relocation if 90 per cent of the community’s residents agree, in writing, to relocate. Following this process, the government completes a cost-benefit analysis and determines whether the cost of delivering services to the community over a twenty year period exceeds the financial assistance that would be given to residents to relocate. In the event that there is a benefit to government, government will purchase the physical property of these communities for values of $250,000 to $270,000 per household.

While this policy has led to the resettlement of a few communities over the last decade, however, it is far from perfect and the government should, instead, consider reviewing one key element of the policy: the high threshold required for resettlement. As stated, this policy requires that interested communities come together on their own terms, organize their own resettlement committee, and organize their own independent resettlement vote. However, since this vote requires that 90 per cent of residents agree, it often means that less than a dozen individuals can hold up individuals from receiving government assistance to relocate (and, as many individuals are unable to relocate without this assistance, it means they are often left with no other choice but to remain). Furthermore, with such a high vote threshold, taxpayers continue to be on the line because of the actions of just a few individuals, including in cases wherein the financial assistance provided by government would outweigh the costs of government assistance relocation. Since taxpayers foot the expenses of these communities, many of which do not have any need for the service provided, it is clearly unfair for these few individuals to put a majority of taxpayers on the line for the continued delivery of services to these communities. Essentially, because of this clear inequity, government should consider reducing the threshold required for relocation or otherwise take a more government-initiated approach.

Overall, even if one believes the premise that government should provide core services to all residents, it is still important to consider at what level are taxpayers receiving the services for which they are paying. For some rural and remote communities, it appears that the actions of a few individuals are often forcing a majority of taxpayers to foot the bill for services that benefit a few lone actors. While these developments may not justify a complete removal of services to these communities, at the very least they suggest the provincial government should take a look at reforming these policies and some other potential solutions to ensure that taxpayers are treated fairly.

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

Is Newfoundland and Labrador a “Petrostate?”

Falling oil prices have directed attention towards Canada’s oil-producing provinces, including Newfoundland and Labrador (NL). While lower gas prices should be a boon to most Canadians, Newfoundlanders look warily to oil’s plunging market price as a sign of harder economic times. In fact, the provincial government recently forecasted $916 million in the red–much higher than previously anticipated.

The provincial government in NL projected 2015 to feature surpluses and fiscal expansion. NL has been benefiting from oil exploitation for the better part of the last decade and has joined Canada’s club of “have” provinces in the wake of a veritable economic boom. Resource extraction can confidently be identified as the sole cause of this boom–as is the case in other provinces such as Saskatchewan–and with it comprising close to 37 per cent of provincial GDP, one may wonder if NL is a “rentier” province and victim to the associated “resource curse” that often plagues naturally abundant states.

Terry Lynn Karl’s influential work on the ideas of rentier states and the “paradox of plenty” provides insight into the case of NL. The former refers to a polity that derives a substantial portion of its revenues from indigenous resource extraction and sale, while the latter refers to the paradoxical effect of resource abundance: weak economic development and overspecialization in extractive industries, corrupt state institutions, and poor governance. Rentier states often suffer from “Dutch Disease,” i.e. when the manufacturing or agricultural sector in a particular country (or jurisdiction) declines in the face of rising natural resource exports, which results in rising wages and currency appreciation. Ultimately, this phenomenon makes exports from other sectors more expensive, weakening their competitive advantage. States like these are often awash with cheap money, encouraging patronage politics, populism and voter apathy à la “no taxation, no representation.” Dependent polities are much at the mercy of global markets, and their dependence on energy exports can exacerbate economic shocks. Moreover, governments in petrostates have little incentive to invest in long-term growth plans or economic diversification.

In Nigeria, for instance, oil wealth has often led to widespread corruption and nepotism, in addition to deterioration of institutional strength. In Russia, it has aided in authoritarian consolidation by Vladimir Putin, while the country is facing a recession as oil prices fall precipitously. Gulf Cooperation Council states also have massive youth unemployment and unsustainable entitlement schemes plague young monarchies struggling to diversify their economies.

Newfoundland has had a long history of dependence on singular sources of income. The fishery, for example, had long dominated the Island’s economy and continued to do so until the 1990s when it suffered a veritable collapse that devastated the province. Much like oil, global seafood markets were subject to flux and rested on global fish prices. Nonetheless, it laid the foundation for Newfoundland’s consistent dependency on external forces for prosperity, which reduces the incentive to develop human capital and diversify the economy. More damaging is that patronage and nepotism in the province became widespread. Eventually, NL began receiving large amounts of federal assistance and, as Kimble Ainslie argues, a distinct political culture of dependency developed in the province.

Dependence shifted from federal money to oil rents as the wells began operating in the early 2000s. Under Danny Williams’ leadership, Newfoundland and Labrador’s coffers filled quickly–and public spending rose in sync–as the province’s economy began to boom. Infrastructural investments under Premier Dunderdale and social spending under Premier Davis did not slow as oil prices began plummeting. In response, the Davis government has abruptly cancelled proposed spending and the future is uncertain, but not necessarily dire.

The legacy and conditions for rentierisme are certainly there, but can one be sure that contemporary Newfoundland and Labrador really fits the petrostate bill? I will explore this question in Part Two.

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