The Hill Times – Canada’s monumental economic challenge: Our increasingly schizophrenic attitude to natural resource development
January 23, 2012 – In today’s Hill Times column, I discuss how to restore the Canadian consensus in favour of natural resource development. The full column is below:
Canada’s monumental economic challenge: Our increasingly schizophrenic attitude to natural resource development
The provinces may control natural resources, but Ottawa controls enough of the jurisdictional, legal, tax, environmental and regulatory levers that it can set the tone and get provincial buy-in for a cooperative national framework equal to the opportunity Canada faces.
By Brian Lee Crowley, The Hill Times, January 23, 2012
One of the best Canadian politicians of his generation, Macdonald left behind him an enduring and powerful legacy. No, no, not Sir John A. The other one: Donald S. Macdonald. A Trudeau-era Cabinet minister, Macdonald is best remembered for his job post-politics. At Trudeau’s behest he headed the eponymous Macdonald Royal Commission, which reported in 1985. Dry-as-dust history? Hardly. A quarter of a century later we forget how Macdonald’s report led us out of a historical cul-de-sac and revolutionized our economy. It is a feat we need to repeat today, so Macdonald’s triumph deserves our attention.
By the early 1980s, the inadequacy of the old protectionist National Policy was plain. Inefficient domestic industry sheltered behind tariff and other barriers. To that inward-looking policy bequeathed us by Sir John A. Macdonald the 1970s had added restrictions on foreign investment, aimed chiefly at U.S. multinationals.
Yet, Canada was hugely dependent on America being willing to absorb our exports. The old strategy had become a Rube Goldberg confection unworthy of a great nation.
But it was deeply rooted in our politics and our neuroses, and particularly our fear of American domination. No government wanted to seize the nettle and say what experts had long since concluded: that a formal free trade agreement with the United States was the only sensible way to promote Canada’s national interest.
Enter Don Macdonald. His royal commission launched a truly comprehensive national conversation about what Canada needed to do to prosper. His fellow commissioners came from different parties, regions and language groups.
Academic papers were commissioned, experts consulted, and hearings held in every corner of the country.
After this impressive national pulse-taking, Macdonald duly reported, among many other things, that Canada’s national interest lay in free trade with the United States. By the next election, in 1988, the deal was done and Canada has never looked back. Macdonald’s massive work of careful, thoughtful and non-political national psychotherapy allowed us to let go of old emotions and prejudices.
Today’s Macdonald will be called upon to unravel a different but equally monumental economic challenge: our increasingly schizophrenic attitude to natural resource development.
Make no mistake: Canada is on the brink of massive development fuelled by our increasingly sought-after natural resources. It isn’t just the oil sands. Potash, natural gas, conventional and non-conventional oil, minerals and rare earths, and more in almost every province and territory all presage investments of tens of billions of dollars, year after year, for many years to come.
Far from being limited to Western Canada and the North, these opportunities can indisputably be harnessed to put Canadians to work in every part of the country. Steel, vehicles, and equipment as well as engineering and other high value services from Central Canada will be required, port facilities and processing terminals will be built on both coasts, unemployed workers will be put to work in high wage occupations, trade schools and universities in our communities will buzz with energy training people for these opportunities. Canadian workers’ pensions will be invested profitably in the companies doing the work, and our financial institutions will scour the globe for the capital needed. And despite globalization, most of the resource extraction work cannot be sent to other countries, because the resources are here.
Our challenge, however, is that the old consensus that properly regulated natural resource development is good for Canada is breaking down.
We see that in the debate over the Northern Gateway pipeline and Quebec’s shale gas today, just as America’s decision on the Keystone pipeline shows that next door the consensus in favour of resource development has collapsed. Aboriginal land and other claims add a further dimension of complexity and uncertainty to project prospects. All this adds up to investors being increasingly skittish about risking their money on projects that may become interminably mired in vexatious and acrimonious approvals processes that are increasingly hijacked by special interests for whom emotion defeats evidence every time.
The consensus can be rescued, but only if Canadians can be convinced that development will go ahead under the most demanding conditions, including responsible environmental standards and fair dealing for Aboriginals. We could then free up technical tribunals like the National Energy Board to return to their original mandate, which is not to be some kind of giant opinion poll dominated by emotive opponents, but to be a place where projects are examined quickly but thoroughly on their objective merits, ensuring they live up to Canada’s high standards.
The provinces may control natural resources, but Ottawa controls enough of the jurisdictional, legal, tax, environmental and regulatory levers that it can set the tone and get provincial buy-in for a co-operative national framework equal to the opportunity Canada faces. But where is this generation’s Don Macdonald? And where is the prime minister who will put him to work?
Brian Lee Crowley is the managing director of the Macdonald-Laurier Institute, an independent non-partisan public policy think tank in Ottawa: www.macdonaldlaurier.ca.
The Hill Times
Ottawa Citizen: The real pipeline debate
By Brian Lee Crowley, Ottawa Citizen, January 14, 2012
The start of hearings about the proposed Northern Gateway pipeline to take Alberta oil to the west coast has been notable mostly for the venomous invective hurled about by the interested parties. Yet beneath the exaggerated charge and counter charge the hawk-eyed can discern the very earliest stages of a national debate that will preoccupy us for the next decade or two.
Like it or not, Canada’s economic strength has always been closely tied to natural resources. We are abundantly blessed with them, we have great expertise in extracting and processing them, we have one of the world’s great markets for financing them, and we have spent liberally on pipelines and railways and ports to take them to market.
In return natural resources have generally been kind to us. Growing global demand has driven up the price we get for them while the cost of many imports, such as manufactured goods, has remained stable or fallen. This improvement in what the economists call the terms of trade is a major cause of Canada leading the G7 in terms of income growth in recent years.
The phenomenal economic development of countries like China and India, with their insatiable appetite for our resources, has broadened markets for what we produce. That doesn’t eliminate the risk of falls in resource prices, but it makes extended declines less likely for the foreseeable future.
Yet at exactly the moment when resource investment and development, particularly in the west and the north, seem poised to take Canada to unheard of levels of prosperity, we are discovering the weakness of the institutions we have created to manage such growth in the public interest.
Take the tribunal holding hearings on the Northern Gateway. It is premised on the idea that Canadians favour the development of their resources, but want that development to proceed in accordance with high standards of safety, environmental protection and social responsibility. Technical experts, paid for by the state, subject things like pipeline proposals to searching analysis and criticism, ensuring that they meet our standards before proceeding. In their analysis they are aided by a mandatory public hearing process that is intended to assemble and then critically evaluate, by written and oral cross-examination, factual evidence put forward by proponents and opponents.
Increasingly, however, a vocal minority sees these regulatory proceedings, not as opportunities to ensure fact-based decision-taking as we develop our resources, but as a place to argue that such development ought not to be allowed at all.
But that is a political and a moral argument that such agencies are not equipped to deal with. There is a world of difference between the assumption that projects that meet Canada’s technical, environmental and social standards are in the public interest and should proceed, and the assumption that development is somehow in principle undesirable and ought not to be allowed.
In the first case disagreements about whether projects meet our standards can usually be resolved by science and reason. In the second case we have disagreements over values and beliefs, such as whether a pristine environment ought to trump economic growth and job creation.
It is not that such disagreements cannot be grappled with in a democratic society. Rather it is that regulatory tribunals are not the place to do so. Conflicts over beliefs and values are properly resolved—indeed can only be resolved—in the political arena. We have to separate the question of whether we want natural resource development from the one about whether specific projects are up to standard.
The stakes are enormous. Under the current dispensation, thousands of people, some of them apparently inhabiting different continents, can sign up to participate in the Northern Gateway hearings causing enormous delay while manifestly not contributing to the tribunal’s goal of ensuring a reasoned consideration of the project’s merits.
Such delays themselves are hugely costly to project proponents but are essentially costless to opponents. Capital that could be used putting Canadians to work and developing our resources can be driven out by regulatory uncertainty and long approval delays just as surely as by outright rejection of a project.
With oil sands production in Alberta set to exceed pipeline capacity within a few short years, blocking new pipeline construction would have the effect of stranding new production and the forgoing of billions of dollars of investment and thousands of new jobs across Canada. Allowing such hijacking of the regulatory process allows a vociferous minority to achieve indirectly what they could not win through legitimate democratic debate: the power to block natural resource development.
The “right to be heard” is an important one, but it has to be made compatible with the right of Canadians to see their resources developed thoughtfully and responsibly. Achieving that balance has just rocketed to the top of the national agenda.
Brian Lee Crowley is the Managing Director of the Macdonald-Laurier Institute, an independent non-partisan public policy think tank in Ottawa: www.macdonaldlaurier.ca.
© Copyright (c) The Ottawa Citizen
Financial Post: NAFTA is really about running a single integrated economy
December 14, 2011 – In today’s Financial Post, I discuss how North America is a deeply integrated, cross-border economy whose most important feature is not free trade in finished goods. It is our ability to make things together and then sell them to each other and the rest of the world. An excerpt below:
On Dec. 7, Stephen Harper and Barack Obama announced their “Beyond the Border” initiative to respond to exactly these practical realities at the border. The intentions are good, but the language is vague and tentative and a U.S. election year is not a propitious moment to advance the idea of more economic openness. But at least the Americans are now committed to an agreement in principle that points in the right direction. It is now our responsibility to make sure we move from pretty words to a workable border regime. Our continental competitiveness and prosperity depend on it.
The op-ed is based on my November 15th Commentary published by the Macdonald-Laurier Institute. The full op-ed is copied below.
NAFTA really about running a single integrated economy
By Brian Lee Crowley, Financial Post, December 14, 2011
What is NAFTA really about?
That might seem a silly question. NAFTA is about trade, right? It is the North American Free Trade Agreement after all.
But what if it is not really mainly about trade at all? Thinking chiefly in terms of trade might actually obscure the real point.
Unfortunately when many people think about trade, they think of it in old-fashioned terms. Each country has its own self-contained economy. And in each economy, that country’s workers make goods and services. Those finished products are then sold to other countries, which make different goods and services in their own little self-contained economy. Japan makes cars. France makes wine. They trade wine for cars.
That is emphatically not what happens for the most part in North America. What we have is not three countries and three economies trading finished products with each other. We have a single economy shared by two countries, Canada and the United States (and increasingly a third, Mexico). We have a single economy awkwardly cross-cut by inefficient and obstructive national borders.
The implication of this one-economy-but-three-countries view is that NAFTA is not (despite its name) chiefly about trading finished goods between separate national economies. It is about managing a highly integrated continental economy in which Canadians and Americans work together to make things. NAFTA should really be called the North American Integrated Production Agreement (NAIPA).
Canadians and Americans do not trade with each other as the French and the Japanese do. We make things together and then sell them to each other and the rest of the world. That is why, for example, about two-fifths of the vast “trade” between our two countries takes place within individual companies. They move goods from one plant to another at different stages of production, and those plants are spread about in both Canada and the United States.
Let me make this eminently practical. I have in my hand a drawing of a rear wheel assembly used in North American auto production. In this drawing every part contained in the assembly has been flagged to show the country in which it was produced. Roughly half the parts were made in Canada, the other half in the United States.
Take one look at that drawing (which is quite typical — it could have been made of any other assembly that goes into cars made in North America) and you realize there is no American or Canadian auto industry. There is a North American auto industry. And dig into each one of those individual parts, and you will find chemicals, metals, castings, coatings and other products from plants in jurisdictions throughout the continent. It is not just the auto industry but the entire continental production process that is increasingly integrated.
The business community got this long ago. NAFTA did not create economic integration in North America. The business community did that over many decades, in response to strategic and economic imperatives. NAFTA was a crude and belated effort to create a legal and institutional framework for an economic relationship that had outgrown national institutions.
If you want to see what North America looks like from the point of view of business, have a look at a map of the continent depicting, say, oil production, pipelines, the rail network or truck traffic. In each case I defy you to spot the border in the business decisions that have shaped these maps. The economic energy of North America surges in all directions, and is increasingly unconstrained by considerations of political jurisdiction—unless, of course, jurisdictions forcefully intrude, as in the case of, say, the Keystone XL pipeline or “Buy America.”
There’s the rub. Politicians respond only to national voters, and so live in a closed political system. Alas, that closed polity is superimposed on an open economy. Government policies that result cannot truly encompass the interests of North Americans, but only of Americans and Canadians separately. Hence we get border thickening in the post-9/11 world and post-recession protectionism in the United States. Canadians’ vulnerability is that we live in another country, but not another economy.
National policy mismatches inevitably show up at the border. An inefficient border is an annoyance in a trading bloc. But in a production bloc, it is disastrous.
To understand why, think again about the rear-wheel assembly. It required that parts be brought across the border in different directions and at different stages of production. The car industry says a North American car crosses the border five or six times in the course of its production — likely an underestimate. A thick border causes our integrated production process to stumble every time the border must be crossed. We lose time and efficiency.
By contrast, a foreign car exported to North America enters our territory only once. Since the car is already made, our border controls don’t disrupt production. Our own production crosses the border innumerable times. Every inefficient or obstructive contact there is in effect a tax that our international competitors do not pay.
North Americans are in this together, building a relationship that is virtually without precedent for its breadth and depth. In thinking about what comes “after NAFTA” we must be capable of the effort of imagination to create institutions that can overcome the political divisions that scar our economic efforts while preserving our national sovereignty.
On Dec. 7, Stephen Harper and Barack Obama announced their “Beyond the Border” initiative to respond to exactly these practical realities at the border. The intentions are good, but the language is vague and tentative and a U.S. election year is not a propitious moment to advance the idea of more economic openness. But at least the Americans are now committed to an agreement in principle that points in the right direction. It is now our responsibility to make sure we move from pretty words to a workable border regime. Our continental competitiveness and prosperity depend on it.
Financial Post
Brian Lee Crowley is the managing director of the Macdonald-Laurier Institute, an Ottawa-based think-tank.
Media Update: The Ottawa Citizen, Wall Street Journal and The Hill Times!
In today’s Ottawa Citizen, I discuss the upside of downloading - cutting transfers to provinces in order to balance federal budgets. Click here for full column.
In my November 28th column for The Hill Times, I discussed the inability of the American political class to tackle their fiscal challenges. Click here to read the full column.
On November 23rd, the Wall Street Journal quoted me in an article about mounting provincial debt. Click here for more info.
The Ottawa Citizen: Pipeline decision will weaken Obama
My latest column for the Ottawa Citizen was published this past weekend. In this column, I discussed Washington’s plan to delay their decision on the Keystone XL pipeline. My column (copied below) also appeared in the November 20th edition of RealClearPolitics, an online news source covering U.S. politics.
Pipeline decision will weaken Obama
By Brian Lee Crowley, Ottawa Citizen, November 19, 2011
H.L. Mencken, I think it was, who uttered the immortal phrase “Nobody ever went broke underestimating the taste of the American public.”
No one is a greater admirer of the dynamic and generous society that is America, and when I consider all the nations we could have had living next door I often think we won the neighbourhood lotto.
But for some reason Mencken’s phrase kept echoing in my head when I heard the news about Washington’s plan to delay their decision on the Keystone XL pipeline.
Folly is too kind a word for this decision. It is the crassest pandering to a tiny minority of Americans whose demands run demonstrably contrary to U.S. interests. And even that electoral calculation is misconceived, for it will weaken, not strengthen, Barack Obama.
The background: the Alberta oilsands must have outlets to markets, chiefly in the U.S. The most efficient way is a new pipeline running through the American heartland to the Gulf of Mexico.
There on the Gulf Coast is a concentration of refineries with the capacity to refine oilsands bitumen, something few refineries are able to do.
Everyone wins. New oilsands extraction and upgrading capacity can continue, fuelling one of the greatest industrial projects Canada has ever seen. Scores of billions of dollars will be invested in this massive resource if market access can be ensured.
There is no prospect of reducing Americans’ consumption of oil in the short to medium term without a painful and unnecessary decline in their standard of living. Most of the alleged alternatives to oil are simply no real substitute for its unique properties, especially as a transport fuel.
Alternative sources of oil exist, but they tend to come from far less desirable places than Canada – think Saudi Arabia and Venezuela. Those places have lower environmental, human rights, labour and rule of law standards than we do. Less oil from Canada doesn’t mean less consumption, just nasty sources of oil.
Moreover building the pipeline would unleash a torrent of American economic activity, chiefly in the depressed construction industry. Trade unions, one of the constituencies most assiduously courted by President Obama, were vociferous in their support.
And yet all this was not enough to secure what is normally a pro forma approval from Washington. The United States is covered in pipelines, which historically are a lowcost means of transporting oil, gas and many hazardous chemicals in an extremely safe manner. Bringing a needed commodity to American consumers in an environmentally sound manner while reducing the country’s dependence on oil from despicable regimes and creating thousands of jobs at a time of high unemployment. That sounds like a lot of ticks in the right boxes.
But the decision to punt the Keystone decision until after the 2012 election was not based on the merits of the proposal, nor on a reasoned assessment of America’s interests. Instead the administration kowtowed to a coalition of NIMBYists and green activists whose arguments were embarrassingly thin.
Take the concern of some Nebraskans that the pipeline would cross the Ogallala aquifer, one of the chief sources of water in a number of the heartland states. Clearly the health of the aquifer is a matter of vital interest for many Americans, and they are perfectly entitled to question the project proponents closely about the danger of leaks.
But the answers should have been more than satisfactory for a state whose entire supply of oil and gas arrives essentially by pipeline. Anyone looking at a map showing the number of pipelines already transecting the territory covering the aquifer would have to conclude that something terrible had happened to make people feel that pipelines had suddenly become untrustworthy.
But other than a couple of entirely minor spills in recent years that represent an infinitesimal fraction of the oil transported safely by pipeline in the U.S., no such incident has occurred. And in any case the pipeline’s proponent has promised unheard of levels of safeguards and construction standards to allay fears of risks that are vanishingly small.
To no avail. The pipeline has suffered the worst fate possible: it became a symbol. To those convinced of an apocalyptic vision of a society hurtling toward environmental Armageddon, XL came to represent the sum of all their fears. Combine that with an environmental movement moving strategically to throttle the oilsands by closing off its access to markets, and you had a political force that made up in passionate intensity what it lacked in either logic or votes. President Barack Obama thinks he has thrown them a bone. Instead what he has done is to give comfort to a Luddite movement that thinks you can make modernity go away by holding your breath until your face turns blue.
The problem is that they may get their wish.
Brian Lee Crowley is the managing director of the Macdonald-Laurier Institute, an independent non-partisan public policy think tank in Ottawa: macdonaldlaurier.ca.
