How Canada adds value to its resources

Brian Lee Crowley, Canada, Energy, Natural Resources, Trade, Uncategorized, Worth A Look

Writing in the Globe and Mail, MLI Managing Director Brian Lee Crowley explains that while Canada is blessed with resource wealth, that alone is not what makes it such a wealthy country. Many jurisdictions that have abundant natural resources are poor or troubled, while some of the world’s wealthiest societies “have no natural resources to speak of”, he writes. Crowley argues that what makes Canada’s resource endowment “almost uniquely valuable in the world is that it exists within another vastly more important endowment of rules, institutions and behaviours”. The Globe ran an edited version of this column.

Brian Lee Crowley, April 18, 2014

Canada is a wealthy country, but not for the reason many people think: that we have lots of natural resources.

Consider that the world’s wealthiest societies, be they Switzerland or Japan or Singapore or Taiwan or Germany, have no natural resources to speak of.

On the other hand, economists often talk about the curse of natural resource wealth because many of the societies that are blessed with such wealth do not know how to control it. Like many a lottery winner they are ruined by their good fortune.

Just think of Nigeria, Venezuela, Indonesia, Angola, Algeria, Russia or Saudi Arabia and ask yourself if you would trade living in Canada to live there.

The natural resource curse is not limited to the developing world. Louisiana has one of the best resource endowments in the United States, yet consistently ranks near the bottom of all the states on most measures of social and economic progress. On the other hand many of the wealthiest states, such as Massachusetts, Connecticut or Florida, have few natural resources.

Canada’s wealth, and the reason why the world beats a path to our resources, lies not in the resources themselves. What makes that endowment almost uniquely valuable in the world is that it exists within another vastly more important endowment of rules, institutions and behaviours.

My list of those institutions and behaviours include the rule of law, independent judges and reasonably speedy and reliable resolution of disputes, the enforcement of contract, the absence of corruption among government officials and the police, respect of private property, moderate, predictable and stable taxation and regulatory burden, a stable currency that keeps its value, responsible public finances, freedom to trade both domestically and internationally, a well-developed work ethic and a refusal to resort to violence to resolve political disagreements. That is the greatest endowment that we have.

What happens when you nest a rich natural resource endowment inside this endowment of rules, institutions and behaviours? Companies can invest billions of dollars to unlock opportunities, such as the oilsands, reasonably secure in the knowledge that they know the fiscal, regulatory and contractual conditions they will face over a period of years sufficient to recoup their investment and make some money. They know they will not be extorted by megalomaniacal presidents or state-sanctioned gangs of thieves. They know their investment will not be nationalized overnight on a change of regime. They know that they are not in competition with favoured state corporations that will take a share of their business with no compensation, or be given access to opportunities on more favourable conditions than foreign investors. They know they can sell their product wherever they can get the best price and they can repatriate their profits in real hard currency.

Contrast this with Venezuela, Russia, Iran or Argentina, to pick only a few examples.

This may all help you to understand why, while it costs about $20 to extract a barrel of oil in Saudi Arabia and $60-$90 (depending on the method) to extract one from the oilsands, oil companies from around the world are vying for the opportunity to invest and develop that resource here. Its institutional context makes it more valuable.

Of course sometimes we fall off the wagon of institutional virtue, which only gives us further evidence that it is the virtue, not the resources, that makes us a rich society.

Consider that when the oil and gas industry was in its infancy in this region, it was centred in Saskatchewan, not Alberta. But then a government came to power in Saskatchewan that changed the institutional context, increased the tax and regulatory burden and preferred to see resources developed by state-run corporations. The result was a rapid exodus of the industry to a more welcoming Alberta.

Then 60 years later the situation was reversed. The Alberta government decided it wanted to increase its share of oil and gas revenues and changed the regulatory and fiscal rules. Investment started to shift to Saskatchewan, now a jurisdiction committed to investment friendly policies. The Alberta premier of the day was affectionately known next door as the best economic development minister Saskatchewan ever had. Alberta was forced to backtrack, but not before a lot of damage was done to its reputation.

Quebec did exactly the same to its mining industry recently and saw its attractiveness as an investment destination plummet despite its rich resource endowment.

The moral of the story: the institutions that enable us to develop our resources are in delicate equilibrium. Greedy governments upset it at their peril.

Brian Lee Crowley (twitter.com/brianleecrowley) is the Managing Director of the Macdonald-Laurier Institute, an independent non-partisan public policy think tank in Ottawa: www.macdonaldlaurier.ca.