« Commuting Sentences | Main | Today's top tragedy »

January 26, 2005

BC's Resource (In)dependence?

Editor's note: We asked Thomas Michael Power, Chairman of the University of Montana's Economics Department, to comment on a new report by BC's Urban Futures arguing that the province's primary economic engine is its natural resource exports. Power disagrees--and argues that true economic development has little to do with exports and everything to do with creating a web of local economic relationships.

Two and a half centuries ago, early economists in France postulated that all wealth springs from the earth: farming, timber harvest, mining, and fishing were the sole sources of value, value that then circulated throughout the rest of the economy. It was not a coincidence that the ruling landed gentry who controlled the dominant resource, agricultural land, supported this theory. In England, at about the same time, a different theory dominated: All wealth results from exports that bring in the outside income that circulates through the economy. It was not a coincidence that the rising commercial trading class strongly supported that theory.

Economics as we know it, starting with Adam Smith, developed as a critical attack on such self-serving narrow conceptions of the “origins of the wealth of nations.” But two and a half centuries later we still have self-interested parties flogging these theories rather than treating them as long discredited and abandoned historical curiosities. The Urban Futures, Inc. consulting group’s “Regions and Resources: The Foundations of British Columbia’s Economic Base” (article here; pdf of executive summary here); is the latest example.

The report argues that the BC economy continues to be almost exclusively dependent on natural resource industries operating in the rural areas of British Columbia. The greater-Vancouver metropolitan economy is simply an avaricious parasite living off the wealth generated by the hardworking folks in the hinter land.

This view of the BC economy is not based on analysis or data but on a simple assumption: All income and consumption and, therefore, well-being in BC is totally dependent on the income generated by BC exports to the rest of the world. There is no other source of economic activity and well-being except the income injected into BC by those exports.

This is clearly a false assumption. If it were true, no economic activity would be taking place on our entire planet since we have yet to enter into trade relationships with other worlds. In the economic history of our planet, we have never made a commercial transaction with extraterrestrials. According to this study, then, there must be no economic activity taking place on Earth. Yet, despite the planet’s failure to commercially export anything, the world’s economy has been expanding at a brisk pace for decades, even centuries.

Let me make a blunt economic assertion: The function of exports is not to “bring money into the economy” to support internal economic activity. Exports have only one function: to pay for the importation of goods and services that we do not produce ourselves. The more self-sufficient our economy is, the less we need exports.

Exports involve combining our work-effort with our savings and the local gifts of nature to produce valuable goods and services that we then send away for other folks to enjoy. How could that improve our well-being? In return we get colorful pieces of paper printed in other countries which are called “money” or, if we are really old-fashioned, a soft yellow metal called gold that we then put in an underground vault somewhere.

How could either of those improve our well-being? There is only one way: We use those foreign-printed colorful pieces of paper or that soft yellow metal to buy from other countries what we cannot easily produce ourselves. Those imports do improve our well-being since they give us access to something that we otherwise would have to go without or produce at a higher cost. So it is the imports, not the exports, that improve our well-being. The exports are a way of paying for the imports.

This is the reverse of the two and a half century old mercantilist theory that Urban Futures Inc. is trying to sell us. We only need exports to cover the cost of our imports and we only need imports to the extent we cannot produce certain things ourselves. Most of our economic activity does not fall into either category.

Where would we get the money that currently circulates within our economy if it were not for exports? The same place we get it now: The government and the banking system would simply create it! Money is, after all, simply colorful pieces of paper, jingling coins, or accounting entries at a bank. Money is a medium of exchange that facilitates internal economic exchange so that we do not have to do all of our trade in barter terms. It is possible to have a totally self-sufficient economy with an elaborately sophisticated economy with extensive specialization and division of labor all facilitated by an internal money supply. The US economy for a good part of its history fit that description, with little more than about 5 percent of its total economic activity associated with international trade. That did not hobble American economic growth.

True economic development does not involve more and more extensive dependence on exports. True economic development consists of weaving a local web of increasingly sophisticated economic interdependencies that create more and more niches for economic actors to deploy their skills and resources in satisfying an increasing range of their fellow citizens’ needs and desires. That increasingly sophisticated web of local economic relationships creates economic opportunity while capturing and holding more and more of the money that circulates within the local economy. This is not a new theory. It was basis of Adam Smith’s Wealth of Nations: The increasing specialization and division of labor.

That, of course, is what the greater-Vancouver economy is all about. It is also that type of diversification that has brought relative prosperity and stability to much of southern BC as the natural resource industries have provided a continuously shrinking fraction of total jobs.

Less than 10 percent of total BC employment is in the natural resource sectors. Is an economic assumption that tells us that 90 percent the Province’s jobs and 85 percent of its production are irrelevant a reasonable way to approach public economic policy? Does an economic assumption that urges the Province’s rural areas to focus exclusively on natural resource extraction with its accompanying dependency, instability and environmental disruption lay out a safe path for sustainable rural development? I think not!

Posted by Thomas Michael Power | Permalink

Comments