Canada's challenges in natural resource development

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Natural resources are increasingly central to Canada's economic trajectory. Our challenge is to maximize the positive spinoffs from resource developments, while minimizing the economic and environmental costs. In that regard, imagine two extreme cases: one in which resource projects generate diversified and lasting benefits, and one in which they do not.

Consider the negative case first. Suppose a resource is discovered in a remote northern location. Using helicopters, a foreign-owned company flies in necessary capital equipment and supplies, even labour. The resource is transported to global markets, also using helicopters. The profits are exported to the foreign owner, and much of the spending on tools, supplies and specialized workers also leaves the country (since these have been imported). Canada's GDP is boosted for a while (until the resource runs out), but much of that wealth never "touches down" here.

The opposite to this negative "helicopter" model is a strategy that maximizes Canadian participation in every phase of the development: exploration, investment, production, supply chain and transportation. This doesn't happen automatically. It takes deliberate measures by the developer (prodded and assisted by government) to maximize lasting benefits to Canadians. Government can invoke all sorts of policy tools in pursuit of this goal, including investment rules, tax and royalty rates, skills and training initiatives, conscious efforts to stimulate a domestic supply chain, even labour-relations policies.

In this regard, a recent Newfoundland government inquiry sheds some fascinating light on the broader social and economic effects of foreign-owned resource developments. The commission, headed by John Roil, was established last October to investigate the long work stoppage at the Voisey's Bay nickel processing operation in Labrador. That dispute between the Brazilian mining conglomerate, Vale, and the United Steelworkers was subsequently settled in January. But the issues at stake are much broader, as the inquiry recognized and addressed in its recommendations.

Newfoundland is a great laboratory for this inquiry. Voisey's Bay comes uncomfortably close to the "helicopter" model of resource development. It is remote. Workers are flown in for weeks at a time, including replacement workers, which Vale used during the strike. There and elsewhere in Canada, Vale has used its global bargaining power to drive down compensation and pensions. That boosts Vale's profits, but undermines the share of resource wealth flowing through the Canadian economy.

Indeed, Newfoundland's entire economy epitomizes the risks of helicopter-style resource development. Thanks to oil and other resource industries, Newfoundland's GDP per capita is high. Along with Alberta and Saskatchewan, it is one of Canada's three "have" provinces. Yet hourly wages are lower than the Canadian average. And personal incomes, shockingly, are still the second-lowest in the country -- $5,000 per person per year less than the Canadian average. Workers' share of provincial GDP (captured in wages and benefits) is lower than anywhere else.

Profits are sky-high: Before the global financial crisis, corporate profits peaked at 37 per cent of GDP, a level unprecedented in Canadian history. But not much of that cream ever flows through the province; instead, it flows directly to head offices, whether in Calgary or Rio de Janeiro.

So how can Newfoundland keep a bigger slice of the resource pie at home? The provincial government has been creative and aggressive in its efforts to do exactly that, negotiating hard with foreign developers to boost domestic content in new projects, investing in training, and spending expansively on social and economic infrastructure. Now the Roil report highlights another important avenue: labour relations.

The power of a global mining giant to suppress compensation costs in any particular location is daunting. Moreover, the inquiry emphasized the risk that global employers may not reflect and respect Canadian labour relations values. The result is not just industrial conflict; more broadly, it reduces the share of resource wealth flowing through the society which actually owned and produced it.

The commission recommended specific changes to labour-relations policies, including new powers to solve protracted disputes through arbitration. It also called on government to use all its policy levers to level the collective bargaining field and push global firms toward more harmonious labour relations.

The Roil report is a careful and thoughtful attempt to come to grips with concrete challenges associated with Canada's growing reliance on globalized resource sectors. It should be studied by policy-makers in all provinces.

Jim Stanford is an economist with the CAW. This article was originally published in the Globe and Mail.

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