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Nine: Kickstarting Development

Almost from the first months following Confederation, Ottawa’s programs affected some regions more positively than others. All provinces did not share prosperity equally; this pattern of regional disparities has persisted and probably worsened in recent years. Initiatives designed to reduce existing disparities and promote economic development in poorer regions were introduced in rapid succession following the late 1950s when national politicians first grasped the large differences in levels of regional prosperity, and accepted responsibility for removing them.

Billions of tax dollars have been spent since by way of regional development and regional fiscal adjustment measures. Yet, no single economic theory exists to explain regional disparities; nor is there yet much agreement on even the best theoretical approach to the problem. One reason for the lack of a coherent overall policy may be that the debate over regional development has been left largely to politicians. A former senior official of Ottawa’s Department of Regional Economic Expansion admitted, "Regional development is sustained almost entirely by politics and by a political commitment." In Ottawa, where regional economic considerations are often equated with partisan politics, programs that are formulated under a "national" label are intended to benefit provinces with heavier political clout. As a result, regional jealousies, feelings of frustration and even anger are built up, while economic disparities between rich and poor provinces, most notably those in Atlantic Canada, are perpetuated.

It is probably on the rocky field of economics that the friction between Outer and Inner Canadians continues in its most acute form. Evidence, both anecdotal and statistical, is abundant. A family left southeast Edmonton in the mid-1980s to return to Toronto from where they’d come in the late 1970s. The continuing flat Alberta economy after the 1982 recession meant there was no longer sufficient work in the husband’s realty consulting field. They finally managed to sell their Edmonton home for about $85,000 and to acquire a smaller one in a Toronto suburb for $215,000 in 1985. Their new home is, of course, worth far more now. Many other Outer Canadians left their homes to establish themselves in one of our largest cities. In doing so, they lost their entire equity. After selling their homes as prices in Outer Canada were sagging, they are now paying rent in Toronto or Ottawa.

A central issue of Canadian unity has to do with income levels across the country. During the most recently surveyed decade, 1971-81, residents of Atlantic Canada had a per capita market income which varied between about 54 per cent (PEI) and 69 per cent (Nova Scotia) of the national average. There is no reason to believe that this state of affairs has since improved for Atlantic Canadians; it has probably worsened significantly over the past few years. A number of government programs, combined with positive factors such as a lower cost of living, mercifully do improve the overall Atlantic picture. The personal disposable income per household in three Atlantic provinces today is about 80 percent of the national average. The overall economic "penalty" for remaining an Atlantic Canadian remains in the 20 per cent range.

It is still true, as a Special Senate Committee on Poverty reported almost twenty years ago, that most low income Canadians are concentrated in Québec and Ontario. It is also true that family incomes for poorer Canadians are generally higher in Atlantic Canada and Québec and lower in the Prairies and Ontario. Average family incomes in Outer Canada, however, are well below those in Toronto, Montréal and Ottawa.

Regional unemployment rates are another important dimension of the economic issue. In recent years the level of unemployment in several provinces is much more than that of Inner Canada. The average Ontario unemployment rate during 1988 was 5 percent; for the same year the average for Newfoundland was 16.4 per cent, PEI -- 13 per cent, Nova Scotia -- 10.2 per cent, New Brunswick -- 12 percent, Québec --9.4 per cent and B.C. -- 10.3 per cent.

Earned income per capita may provide a more accurate measure of a region’s economic performance than per capita income. Earned income excludes relative gains resulting from interregional transfer payments and thus better reflects the overall economic prospects of a province or region. According to this indicator, regional disparities are even more pronounced, and disparity narrowed only slightly between 1961 and 1981.

Another interesting measurement is the total amount of government spending in each province as a percentage of the province’s gross domestic production. In 1981, the national average was 39 percent, but it was 69 per cent in PET, 81 per cent in Nova Scotia, 72 per cent in New Brunswick, 63 per cent in Newfoundland, 47 per cent in Québec, 35 per cent in Ontario, 41 per cent in Manitoba, 35 per cent in Saskatchewan, 23 per cent in Alberta, and 32 per cent in B.C. In 1987, combined federal and provincial government spending equalled almost two-thirds of the economy of the Atlantic provinces -- almost twice its significance in Ontario (37 per cent). In Saskatchewan, the government share in 1987 soared to 64 per cent from 35 per cent in 1981. In Alberta, government spending amounted to 38 per cent of the provincial economy the same year compared with 23 per cent in 1981 when the province was far less dependent on the public sector to sustain its economy.

No doubt, this public spending has allowed residents of our poorer provinces to enjoy a higher standard of living than would have been the case without transfers. Yet, provinces where the percentage of public spending is very high are becoming almost financial wards of Ottawa. The well-being of their residents is to a substantial degree dependent on the inclinations of the federal government. In the long run, moreover, their development may actually be hindered by transfers since the adjustments required for greater economic self-sufficiency are less likely to be made.

One major consequence of the stress created by these economic conditions over the decades is that larger numbers of Outer Canadians are emigrating to southern Ontario and elsewhere in search of better futures. The 1986 national census documents point out this pattern: that year approximately 1,000,000 Canadians lived in different provinces than they had five years earlier. During the 1976-81 period, the four provinces of Western Canada overall gained about a quarter of a million inhabitants through inter-provincial migration and about 200,000 more through immigration from outside Canada. Following the economic recession that hit the Western economy in 1982 and lasted several years, the region gained a few thousand people through inter-provincial migration. The four provinces did manage to attract 150,000 newcomers from outside Canada. These newcomers -- often bringing children, and usually very hardworking -- helped to fill our schools, provided impetus to construction, assisted in finding new markets for our exports and generally boosted the four economies. They also enriched many communities culturally and intellectually.

For Atlantic Canada, the demographic trend was uniformly bleak. In each of the four provinces, more Canadians were leaving than moving in during the 1976-81 period. Newcomers from abroad were too few to offset the losses. The pattern improved slightly in the 1981-86 period, but not enough to significantly alter the region’s or any of its provinces’ share of our national population. It continues to be about 9 per cent of the total.

Québec’s post-1971 experience is similar to that of Atlantic Canada. Between 1976 and 1981, its overall loss of population to migration within Canada was a little over 140,000 people. A little more than half this number settled in Québec during these years as immigrants from outside Canada. A low provincial birth rate was another blow to its hope for an increased share of the national population. In the five years up to 1986,63,000 more Québeckers were leaving the province than moving into it from other provinces. Only 72,000 moved in from abroad. Many Québeckers fear that their share of Canada’s population is bound to drop below 25 per cent before the turn of the century. This fear has became grist for the independence mill.

From 1976-8 1, Ontario lost about 78,000 residents through migration almost entirely to B.C. and Alberta. During the next half-decade, Ontario’s net interprovincial migration alone more than offset those losses. Moreover, the province received another 221,000 immigrants from outside Canada for an overall gain in newcomers alone of more than twice the population of Prince Edward Island.

Regional Disparities

The statistics show that economic disparities have persisted despite efforts by a series of federal governments. The contrast has been most evident between Central Canada-- southern Ontario, in particular-- and the Maritimes, parts of Québec, Northern Canada and Western Canada.

Acknowledging the differences in the regions, Liberal and Conservative governments since the late 1 950s have attempted to equalize funding, programs and opportunities for Canadians. They endeavoured to develop an effective policy approach after breaking the elements of regional inequality into a number of broad categories: the natural endowments of a local economy, such as geographic features that provide economic benefits, e.g., oil; the inequity of certain federal or provincial actions where disparities can be most successfully reduced; market imperfections caused by local monopolies; particular consumer preferences in a region, etc. The Walter Gordon Commission in the l950s examined this subject and the Trudeau government, elected in 1968, established a series of programs beginning with the creation of the Department of Regional Economic Expansion in 1969. The Department of Regional Industrial Expansion followed in 1982-83.

In the early 1980s, an Industrial and Regional Development Program was announced and the Department of Industry, Science and Technology was created. The Mulroney government founded three regionally based agencies: the Atlantic Canada Opportunities Agency is to spend a $1.05 billion budget over five years on developing the economy of the Atlantic region; NORFED was established for Northern Ontario with a budget of $55 million over five years; and the Department of Western Diversification was launched for the four western provinces with a five year budget of $1.2 billion.

Yet, despite a host of government efforts and repeated reorganizations of the departments over the years, regional disparities have not been reduced significantly. Equally important, regional disparity in public attitudes have remained at high levels. Outer Canadians in 1990 feel disenfranchised from their national government in a general sense according to how far they live from Ottawa.

Dissatisfaction has led to periodic and at times almost comical reorganizations of federal efforts, often reflecting the desire of various ministers and cabinets to put their own mark on regional development policy. Numerous regional initiatives sought to create jobs; but they didn’t achieve the changes in the structure of provincial economies needed to ensure long-term opportunities for sustainable growth. Creating new jobs usually implies that growth has occurred. Growth alone should, however, not be confused with economic development as it may not mean any improvement in the region’s future prospects. A greater scope for self-sustaining growth in a given area-- a fundamental change in its ability to create its own wealth -- is required before we can speak of economic development.

The persistence of regional economic disparities is widely recognized as a major threat to national unity. According to Donald Savoie, a national authority in the field of regional development, extremely powerful and costly countervailing forces would be necessary to change existing development patterns and abolish regional disparities. "The burden that would be imposed on the ‘have’ regions would be so large that it might well be unacceptable and could threaten national unity quite as much as would persistent and pronounced regional disparities," he says.

Many Outer Canadians want regional disparities in Canada to be reassessed and a new set of regional development objectives to be adopted. Those applied in the late 1960s are still seen as sound by too many in Ottawa and some provincial capitals: they must be revised. The goal of reducing regional disparities as traditionally defined by income and employment levels is today unrealistic.

I do not intend to assess past policies and programs that have been tried in Canada’s regional development efforts or to assess their success in alleviating regional disparities. Nor is a solution offered that would bring a dramatic breakthrough in the field. Inspired by a persuasive example of new and better thinking, the recent monograph prepared by Dirk de Vos, an Ottawa official associated with the Research Centre for Technology Management at Carleton University, I’ll attempt to put regional development into a new perspective in the following section.

Regional Development: A New Look

Canadians, says De Vos, have ample resources for sustainable regional economic development: space, capital, location, people, materials, knowledge, markets and means of communication. The resources we do not have we can get abroad. And yet, in various parts of Outer Canada, residents face essentially three options: "get smart, get poor, or get out." Residents have to decide whether their region will compete on skills and quality of effort (get smart) or to reduce their standard of living to compete on cost (get poor) or simply lose population (get out). This is what one might call the Atlantic Canada syndrome.

The heart of the issue is the ability of a region to manage what it has got or can get. National and provincial governments can do much by way of removing barriers and constraints -- whether fiscal, regulatory or trade-related -- but the key question remains: can a province manage its actual and potential resources?

No community anywhere in Canada or across the earth is without resources. Singapore’s resources consist of people and location-- nothing more. Hong Kong has no land. People without markets for their products have gone out to create them. A remarkable feature about the Japanese economic miracle is that, contrary to conventional thought, they have often done things backward. The Japanese tend to first create or capture a market for exports, using borrowed money and borrowed technology. Once they "own" the market they invest equity and profits in further research and development in a major way. Canadians across the country might try to copy this Japanese approach in the markets of the Pacific Rim.

In contrast, Canada’s regional development efforts have followed the traditional way of thinking. Federal and provincial governments alike have sunk billions of dollars in first building up infrastructure and subsidizing research and development. The idea was that the public sector first invests in bricks, mortar, roads, airports, harbours, schools, shopping centres, industrial parks, production lines, tourist facilities, dams, power lines and all sorts of "growth poles." Then the governments subsidize research and development -- the magic process of creating new science and technology. Canadian scientists loved it, and so did many participating companies --mostly large and foreign-owned -- who walked away with the write-offs and the credits considered to be the second-most generous in the world.

It was hoped that these two types of infrastructural investments --hardware and research -- would sooner or later create business and wealth in the fashion of a production process. The Americans, for example, have statistics showing how until 1980 on a per capita basis, incomes across the United States continually converged, i.e., tended to become more equal.

Canadian governments made similar claims. Regional disparities, for one reason or another, tended until 1980 to become less pronounced. Around 1980, however, a basic change took place: the gap between regional per capita incomes and the average national per capita income was widening. In many cases, this pattern could be attributed to well-known forces such as the collapse in commodity and energy prices, low labour-cost competition from developing countries, the Japanese onslaught, the glut in the world automobile markets, or the formation of regional trading blocs. Simultaneously the ability of Ottawa and other central governments to control the impact of external forces had weakened. Governments manipulated income taxes, exchange rates, interest rates, and money supply to bolster or cushion their economies. They also borrowed to the hilt, or beyond it in the case of Canada, but such methods are now running out of steam. The economists’ computerized economic models simply no longer work. As if in desperation, national governments, including Canada’s, began to shift responsibilities and spending burdens back on to the shoulders of regional or provincial governments. These, in turn, are leaning more heavily on municipalities which in many instances must absorb mounting social assistance costs.

At the other end of the spectrum, there is another pervasive force at work: the increasing globalization of economic activity, which, in many cases, ignores, or to a certain extent neutralizes, national boundaries. The Canada-US Free Trade Agreement and the Single European Market of 1992 are only two of many dramatic examples of this world-wide trend. Meanwhile, regions are re-emerging as economic actors within a globally competitive world. Within nations, pronounced regional disparities are appearing once again -- for example, between the southeast and the rest of Britain; the south and the north of Italy; the east and the west in Australia; between Bavaria and parts of the Rhineland and the rest of West Germany; and also within the United States. Our country is no exception to this trend. Some of these regions are quite small; some of them straddle national boundaries. Examples of integrating such regional economies abound: along the north-eastern and north-western coasts of North America, around the Great Lakes, in the basin of the Rhine River.

What can be done for, in, and by a disfavoured region in Outer Canada to build greater economic viability? A region can do nothing about where it is located nor can it do anything about the resources within its borders. Yet it has the ability to control what it does quite aside from its infrastructure or the amount of research and development performed within it.

Most conventional economists fall back, time and again, on the availability of the so-called factors of production -- land, skilled labour, capital and technology. They speak about comparative advantage as a kind of automatic benefit created by the particular configuration of these factors of production in a given region. They assert that if you have land, skilled labour and capital, but lack the technology, then you must create technology or go out and buy or rent it. Hence the new battle-cry: "R & D and technology will save us." We live in an information-intensive economy; therefore we need more information. The Fraser Institute in Vancouver has gone so far as to assert that a country or a region can now be viable and wealthy merely on the basis of an information-intensive service economy. This is a very dubious proposition.

Other economists say that a region should focus on particular sectors in order to be competitive, whether agriculture, transportation, pharmaceuticals, or telecommunications. They argue that competitiveness and productivity vary from sector to sector and that some sectors are better than others. If there is a slump or oversupply in world markets, we must quickly get out of the steel industry, agriculture, shipbuilding, textiles, footwear, automobiles or whatever. Indeed, everybody should be into computers, biotechnology and new materials. This is true to a degree, but the essential point here is that many development experts also stress the importance of a region’s ability to change and adapt to external circumstances.

What is often overlooked is that in each of these sectors there are regions and businesses that are not adversely affected by the changes. The so-called sunset industries remain successful and profitable while other regions and companies fail miserably in the so-called sunrise sectors. More seems to depend on who is doing what than on what is being done.

Approximately four years ago, the Commission of the European Community examined this phenomenon. It produced a report entitled Sectoral Productivity and Regional Policy. Having looked at productivity trends across various sectors and regions in Western Europe, it concluded that "productivity disparities are greater among different regions in the same sector than among the various sectors within the same region." The sectoral composition of these regional economies holds very little explanation on the levels and the growth rates of productivity, the study concluded. Nor did it make sense to classify sectors as being advanced or backward.

Others who have looked at economic performance differences among nations noted that it did not seem to depend on what kinds of business some nations were in. The Japanese, to their credit, appear to make a success of almost anything they tackle from electronics to mandarin oranges. Why have the Danes been so much more successful than the Dutch in the industrial exploitation of the dairy industry? What distinguishes the brilliantly successful Swiss pharmaceutical industry? Why is Sweden far ahead of Canada in the technological and design exploitation of wood and metals? Why are the Finns so far advanced in applied technologies in the forestry sector? It has little to do with the resource endowments -- cows or pastures, forests or mines -- little to do with their location or the size of their economies.

First, regional productivity depends less on endowments and particular sectors and more on something else. Second, competitiveness is not a function of having or providing land, skilled labour, capital and even technology; nor does the secret lie in "comparative advantage." Third, external forces are important but they are not conclusive. For example, even after a 100 per cent appreciation of their currency the Japanese have achieved an annual current account surplus of U.S. $80 billion and the profits of more exporting Japanese companies have soared. Many have also adapted well to the environmental needs of the day by reducing the amount of resources used in their manufactured products.

We must therefore look again at factors that are internal to regions and capable of being controlled. The brutal message is that in the long run, if a region is incompetent it will remain uncompetitive, whatever its level of endowments and whatever sectors it tries to exploit.

The more pertinent question, of course, is: what and whose competence or incompetence do we have in mind? Numerous signs now point in De Vos’s view, which I share, to the issue of managerial competence, the skill of local politicians and bureaucrats as much as of the managers of enterprises, whether large or small. This competence has to do with two distinct spheres of activity: the management of individual enterprises, whether public or private, and the management of the linkages between or among enterprises, public or private.

One should not equate management with investment. In the final resort it is not a question of physical infrastructure and plant and equipment and raw materials or even of generating or acquiring technology. Nor, in the first instance, does the burden rest on employees and labour skills. As for the technologies, even companies that spend 12 per cent or more of their sales on research and development agree that technology is not the problem. The technology of the humble zipper was available thirty years before its successful marketing. Some entrepreneurs even shun the opportunity of being "first to market" because of the well-known problem of the "liability of leadership." In fact, few major innovations have been developed by their originators.

What counts is the management of technology and the management of enterprises and of the linkages among businesses at the regional level almost regardless of the types of technology or the industrial sectors in and around which the activities take place. In a broad sense, the issues are social, not economic or technical. They have to do with organization. More specifically, they focus on the organization of linkages both within an enterprise and among enterprises. These linkages are not only vertical between, say, suppliers and users and horizontal among similar players but they also depend on feedback loops within systems.

This is the real secret of Japan and of the regional productivity gains identified in Europe. A successful region or enterprise is one that is able to add value to almost anything by integrating its activities through the management of linkages. What we are looking for is not so much the management of technology, albeit a crucial matter, as the technology of management. In fact these two interact with each other. Mastering the technology of better management by committed local people is where regional development policy should now focus not only our attention but also our resources.

Governments and business in Outer Canada must concentrate on improving local managerial capabilities and functions. A region is much better placed than any other geographical or political entity to master and practise the art of exploiting linkages. First, a region is geographically confined; sooner or later spatial factors assert themselves despite all the talk about the global village and electronic networks. This is why many sensible economists are economic geographers; they have their feet on the ground. For this same reason, engineers are such useful people -- they deal with the real world. Perhaps the best thing the American General Douglas MacArthur did after the war was to put Japan’s industrial resurgence in the hands of engineers, after he had fired most of the economists, especially the ones who preached comparative advantage.

A region also has a degree of social or cultural homogeneity, which helps to enhance the quality of communication, the essence of linkages. Residents of Cape Breton share the same history; so do those of northern Saskatchewan. Also, regional loyalties can be quite strong and command a high degree of commitment and self-interest. A region can redefine itself, an important aspect of the ability to adapt to change, to survive and to prosper. The new linkages that are forged will also help to redefine the region. Thus a region can become more flexible and more innovative as it develops new internal and external alliances. In fact, it may become part of a different region for different purposes. Linkage is a creative process, but it has to be managed.

A country or region or enterprise can no longer wait for these things to occur haphazardly. Technological and market windows of opportunity appear and pass quickly, so one must be organized in advance to be able to seize them when they open up. Japan can apparently jump on to any passing train. Hong Kong and Singapore prosper in the same way. They are able to gear up an existing organizational infrastructure on very short notice.

The need to be able to manage technology rather than simply relying on capital subsidies or research and development incentives has finally caught the attention of people in other countries and regions. The first major American conferences on the management of technology took place in early 1988; the first important European conference on the subject was held in Belgium in mid-1989. In June, 1989 the Department of Industry, Science and Technology organized in Ottawa its first in-house pilot introductory course on the management of technology for the benefit of departmental officers who deal directly with business people usually in Outer Canada.

Technology management is a multi-faceted art, not easily taught or learned. Just as in the field of computing and communications the emerging emphasis is on the software, on programming, rather than on the hardware; and just as in the management of technology the focus shifts from the technology to its management, so, on the managerial side, more attention must be paid to the organizational aspects of management. Innovation as well as production and marketing depend more and more on designing and exploiting linkages.

Consider the ongoing problem of technology transfer within companies, among companies, among universities and businesses, and within and among regions and countries. It boils down to the nature, quality and extent of vertical and horizontal linkages and their management. Outer Canadians in particular can no longer take a hands-off attitude to these processes. Linkages themselves are an engine of growth, which can be harnessed for profit, if not economic survival. Thus, in both our public and private sectors, and between them, managers must develop a better capacity to understand, use and exploit various forms of co-operation, whether we call them strategic alliances , partnerships or joint ventures.

These have been practised very successfully over the years in particular fields such as oil and gas exploration in Western Canada and elsewhere. Prairie farmers do not have to be convinced about the value of cooperatives and agricultural extension services. Such reservoirs of experience could form a good foundation for the more sophisticated modern approaches to the art and science of inter-community linkages, particularly when they involve technology. Indeed, an impressive consulting service for businesses in Australia was directly modelled on agricultural extension services despite the added difficulty that business people, unlike farmers, are often in direct competition with one another.

Speaker after speaker at conferences on the management of technology arrive at similar conclusions, namely, that the crucial difference lies in organizational structures and processes and their design and management.

Considering the complaints of many Outer Canadians, the fact that regional supply factors are more important than national demand factors is as staggering as the fact that sectoral factors are relatively unimportant. What matters most is the deep interdependence among the actors and sectors in the same regional economy. And surely, this is a management problem. What we do not need are more institutions, more "centres" of this, that or the other kind, more bureaucracies, more studies and reports, or probably even more borrowed public money to be dumped into the black hole of conventional regional development notions. Western Diversification, for example, prides itself on its funding to date of more than a thousand enterprises. All Westerners hope the long-term success rate will be high. I worry when I hear accounts such as the one only a few months ago from a local manufacturer in Edmonton who came to my office to complain that a competitor generously subsidized by Western Diversification was threatening to put him out of business.

Equally important is the realization that regions, and quite often small ones, now interact directly with the global economy and no longer necessarily through or by the grace of the central or federal authorities. For example, the state of Texas has an observer in meetings of the Organization of Petroleum Exporting Countries (OPEC). Regional interests often straddle national boundaries as demonstrated by the recent meeting of two Western premiers with the governors of several Western states.

Ottawa must rethink its regional development programs in fundamental ways. Likewise, Outer Canadian leaders must redefine their strengths and concentrate on the areas where those strengths are greatest. As usual these kinds of change can be either a threat or an opportunity. At the very least, they put regional development into a new perspective.

The new challenge will bring out the best or the worst in Canadians everywhere. We have a splendid developmental opportunity. We could start by mastering such difficult things as the ability to exploit linkages where the actors compete and co-operate at the same time. Simultaneous competition and collaboration within partnerships and among businesses is one of the apparent contradictions that can now be put to work for the benefit of both Outer and Inner Canadians generally.


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