The Staple Theory @ 50: Gord Laxer

The next installment in our special series of commentaries celebrating the 50th anniversary of Mel Watkins’ classic article on staple theory, focuses our attention on the latest staple boom to remake Canada’s economy: the bitumen sands of northern Alberta.  The author is Gordon Laxer, founding Director of the Parkland Institute at the University of Alberta.

Alberta’s Sands, Staples and Traps

by Gordon Laxer

When Dwight Eisenhower appointed Engine Charlie Wilson his Secretary of Defense, Wilson, who headed General Motors, was asked if he could make a decision adverse to General Motors’ interests. Yes, but I can’t conceive of such a situation “because for years I thought what was good for our country was good for General Motors, and vice versa”.

Sixty years later, Alberta and Ottawa hold a similar blinkered view. Except it’s Alberta’s Sands oil not autos that run this country. “What’s good for the oilsands is good for Alberta and Canada”is the refrain. Greed around oil, especially of the tarry sort, so distorts the petro elite’s perceptions, they can’t conceive of, or at least countenance, a Canadian public interest separate from that of exporting as much Sands oil as possible.

If Alberta continues to pin all its hopes on the Sands, it may well suffer a fate similar to the auto rust belt in Michigan and southwestern Ontario. In the 2030s, people will shake their heads about the folly of Alberta having madly excavated its way down into a “fossil fuel belt,”while elsewhere they stopped buying or transhipping dirty Sands oil and moved on to a low carbon society. Alberta’s economy was left with little but the detritus of closed Sands projects and leaking tar pits.

This is not Alberta’s inevitable future. But it is bound to be if Alberta doesn’t start changing course now.

The Alberta Premier’s Council for Economic Strategy, headed by former Trade Minister David Emerson, acknowledged the danger of Alberta failing to diversify its economy. Their 2011 report warned that “the creation of an affordable, environmentally friendly alternative to oil would be a great thing for the world. It could be economically devastating for Alberta if, when it happens, we are still heavily dependent on oil exports.

Daniel Trefler, a University of Toronto Business professor, asks whether Canada wants to be an innovation-based economy or a resource-based economy. Unfortunately, we can’t be both. Trefler calls the decimation of Canada’s innovation based economy, centred in manufacturing, the “loonacy”of parity with the US dollar.

“As the commodity-driven Loonie rises, “it becomes too expensive to produce innovative goods and services in Canada … That’s Dutch disease. That’s the weakness of a strong loonie” (“The loonacy of parity: How a strong dollar is weakening Canada,” Globe & Mail, October 16 2010).

The Economist coined the term “Dutch disease” in 1977 to describe the effects of a North Sea natural-gas boom in the Netherlands in the 1960s. It drew in vast amounts of foreign capital, greatly inflated Holland’s Guilder, and priced Dutch manufactures out of domestic and export markets.

Never having heard of Harold Innis, Canada’s brilliant political economist who developed a grand narrative of Canadian history as depending on a succession of staples – the export of raw materials – the Economist Magazine came up with “Dutch disease”.

Previously accepted by the political right, centre and left, “Dutch disease” became ideologically charged in Canada in the spring of 2012 when Thomas Mulcair raised it in a hard-hitting Policy Options article.

Dutch disease was then catapulted from the obscurity of academic and policy wonk discourse to public debate. Brad Wall, Saskatchewan’s petro-promoting premier, attacked newly-chosen NDP leader Mulcair for blaming the loss of jobs in manufacturing and other sectors on the tar sands’ role in boosting the Canadian dollar. Unfortunately Mulcair backed down, and says he is never going to preach against developing the oilsands.

How useful is Innis’ staples approach in explaining how big, mainly foreign oil companies in Alberta’s Sands fashioned Alberta’s and Canada’s economic policy around their interests, even framing TransCanada’s Energy East pipeline that would export more Sands oil as “nation building”?

The staples approach brilliantly explains how Canada got caught in a series of resource or staple exporting ruts. The oil boom in Alberta’s Sands is the latest example of how digging up tons of stuff and shipping it out raw distorts Canada’s economy and kills more jobs than it creates. But the approach is less good on how to get out of staple traps.

Brendan Haley takes us a giant step forward, arguing that the staple trap around bitumen is also a carbon trap (“From Staple Trap to Carbon Trap,” Studies in Political Economy 88, Autumn 2011). I then go a step further to argue that using the staples approach to understand and overcome the dominance of Sands oil, can itself be an intellectual trap.

Mel Watkins’ 1963 article on the staple theory of economic growth was a landmark; I regularly assigned it in grad seminars. While very illuminating, the article has limitations associated with Watkins’ early liberal phase, as Mel readily recognized in later revisitations of the article. Written when an applied version of Keynesianism was at its height as official doctrine in the capitalist West, Watkins’ staple theory of economic growth is infused with Keynesian assumptions.

Watkins original article reformulated the economic history insights of Harold Innis into a theory of economic growth. It is a capitalist developmental model around a resource base, a variant of a more general growth model built around exports as the leading sector. External demand for resources drives the staples variant.

Watkins took up A.O. Hirschman’s concept of forward, backward and final demand linkages’ to show how a staples economy could diversify beyond a simple, hewers-of-wood base. The key is that industries develop that are closely linked to the exported resources. Forward linkages often focus on primary manufacturing to upgrading the raw resources before exporting. In oil, these linkages could be built around bitumen upgraders, refineries and a thriving petrochemical industry.

Branching out further from oil and natural gas could lead to producing everything made of plastics, solvents, fibres, pesticides and coatings. Alberta never got far down that path. In the 1980s and 1990s, Alberta had a successful petrochemical industry based mainly around turning Alberta’s temporarily cheaper natural gas into intermediate goods like ethylene, propylene, butylene and benzene.

But Alberta was in a very narrow, semi-industrial rut. Although it had some forward and backward linkage industries, it remained highly dependent on continued external demand for oil and natural gas. Petrochemicals supported more jobs than exporting raw materials only, but an economy built mainly around the exported resource is not much better off than a pure resource exporting one because they usually provide few jobs and tend to rise and fall with the staple. That’s not true diversification.

Backward linkages encompass activities that enable the resource to be extracted and moved to market. They can include building the roads, pipe for pipelines, and machinery used in extraction,such as oil derricks and supersized trucks that remove the Sands “overburden”.

The Bitumen Cliff report written by Tony Clarke, Diana Gibson, Brendan Haley, and Jim Stanford (Canadian Centre for Policy Alternatives, 2012) shows that Alberta spends over $20 billion a year on machinery and equipment, the demand for which is greatly driven by enormous capital spending in the Sands. Most of the supersized trucks are imported.

The Keynesian, final demand linkage (the third diversification prong in Watkins’ staples theory) provides a possible route out of a narrow resource base and closely associated industries. It is a market-oriented way for domestic industry to grow up around resource workers, if their consumer spending creates sufficient demand to support a broad range of local goods and services. If the population grows enough, it can sustain economic activities that have nothing to do with the original resources, or later discovered ones. It’s become diversified.

The oil and gas staples have boosted Calgary and Edmonton into million-plus cities with enough people to potentially sustain diverse sectors, in ways that say Saskatoon and Regina, cannot. I say potentially because they have not yet realized most of their possibilities. Focus on oil and gas hinders broadening out. When the best money can be had in oil and natural gas, why bother with other pursuits?

The final-demand linkage model is very limited, depending too much on a passive market paradigm. Peter Lougheed’s Progressive Conservative government of the 1970s and early 1980s pursued this strategy, and the Alberta NDP has currently adopted a variant of it.

Unions, the Alberta NDP and the federal Greens now demand the upgrading and refining of Sands oil in Alberta. They are by no means sure of winning this demand. The diversification strategy runs the risk of resource depletion, or boycotts against environmentally-destructive extraction and upgrading processes. But if they do win, it will create workers and businesses whose economic interests lie in hindering effective climate action such as reducing the demand for oil, or switching to alternatives such as wind, solar or deep geothermal to power up electric cars, trains and rapid public transit.

It would dig Alberta and Canada deeper into supporting the development and continuation of the Sands for the foreseeable future. Once new sunk costs in upgrading and refineries are added and refinery workers and their families settle in, how could unions and the NDP then advocate phasing out the Sands? They couldn’t and wouldn’t.

We must not let the major constituencies capable of pushing a new vision for Alberta and Canada get sucked in to defending the carbon-emitting, destructive status quo of Alberta’s Sands. Instead of being important forces pushing Alberta and Canada toward a transition to a new green economy, they would become part of the problem.

I used to support the staples diversification model. Upgrade the resources in Alberta. Don’t export ‘our’ jobs. Use way less energy, but get way more value added from it. Now I think it’s a dead-end. It bets that the age of fossil fuels will unproblematically continue, and that we can blithely continue to spew out carbon without limit.

As we saw, the staples theory views the final demand linkage as the best way to fully escape a staple trap. It’s based on consumer spending and economic growth.

The Keynesian post-war bargain went like this. If workers and their political allies agreed to forget their long-held dream of replacing capitalism with a more just system and accept annual pay raises instead, they would stay in alienated jobs with long work hours, but reap the rewards of middle-class, consumer lifestyles as compensation. The grand bargain led to a mass society fixated on over-consumption. It will bury us in carbon and climate change chaos.

A better path is deep conservation. A unit of fossil fuel energy saved and not burned is much better than one extracted, used up and emitted. Many more jobs can be created in saving a unit of carbon energy through things like building LRTs, a high-speed, intercity train between Calgary and Edmonton, and retrofitting buildings and houses.

Brilliant theories are usually double-edged swords, illuminating the way through seemingly disparate, murky phenomena and at the same time blinding us from other paradigms. So it is with the staples theory. It’s hard to beat its explanatory power regarding how Alberta Sands oil got to be Canada’s latest staple, impeding broader development. But with its Keynesian, consumptionist premises, the staples theory (in that original incarnation) can also be an intellectual trap, that hinders our transition to a low carbon future.

Gordon Laxer is a political economist and the founding Director and former head of the Parkland Institute at the University of Alberta. http://gordonlaxer.ca/