Study: Canada’s national wealth overly reliant on oil, housing

‘We’ve got to keep our eye on that comprehensive wealth bottom line’

Petro-Canada's Edmonton Refinery and Distribution Centre glows at dusk in Edmonton. (Dan Riedlhuber/Reuters)

Petro-Canada’s Edmonton Refinery and Distribution Centre glows at dusk in Edmonton. (Dan Riedlhuber/Reuters)

OTTAWA – A comprehensive measure of Canada’s national wealth shows it has been stagnant for decades and is too heavily dependent on housing and oil and gas, says a groundbreaking national report by the International Institute for Sustainable Development.

This week’s federal government approval of two expanded oil export pipelines simply drives home the “imperative” that Canada use its fossil fuel wealth to diversify the economy, IISD president Scott Vaughan said Thursday.

“What we’re saying is this is a roller-coaster; we know it’s a roller-coaster,” Vaughan said at a news conference in Ottawa.

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“What goes up tomorrow will come down again. If you’re looking at what are the long-term trajectories to build Canada’s wealth, we’re saying we need to move on this (low-carbon) transition now.”

Income inequality has become a subject of fierce debate in recent years, with some observers insisting Canada has not experienced the same economic polarization seen elsewhere, particularly in the United States.

The IISD looked at Statistics Canada data from 1980 to 2013 and determined that Canada’s “human capital” quotient — which represents 80 per cent of the country’s comprehensive wealth — flatlined over those three decades, even as educational credentials rose. The lifetime earnings value of the Canadian workforce did not increase at all during those three decades, once inflation and population growth were taken into account.

Produced capital, by contrast, climbed a robust 1.68 per cent a year on average — but 70 per cent of the growth was concentrated in two sectors, housing and oil and gas extraction.

Physical depletion and changing markets, meanwhile, meant Canada’s natural capital — representing the value of “minerals, fossil fuels, timber and agricultural land per person” — fell 25 per cent between 1980 and 2013 (a measure taken even before the steep fall in world oil prices wiped billions of dollars of value from Alberta’s oilpatch.)

The overall picture, said report author and statistician Robert Smith, is that Canada started with enormous natural capital but has been losing ground relative to other G7 members and other developed countries for years.

“Large endowments of natural capital are a massive gift — but apparently they’re in some ways a bit of an albatross, as well, in the sense that they seem to be correlated with slower growth elsewhere” in the national economy, said Smith, who said Australia is facing the same situation.

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It’s an uncomfortable thesis for a federal Liberal government that is currently setting out to sell Canadians on pipeline expansion on the premise that those increased oil exports will benefit the whole country.

What’s really at issue is the value of gross domestic product, or GDP, as an indicator of overall national wealth.

The metric, first inspired by the need to measure Second World War economic production, was described earlier this year by William Robson of the C.D. Howe Institute as “so 20th century.”

Rising GDP is good for the whole country, Smith said Thursday; “nobody’s going to argue with that.”

“Yeah, it’s great that resources are there to be exploited. But we’ve got to keep our eye on that comprehensive wealth bottom line and make sure that it’s growing along with GDP. The story in the report is that it hasn’t been growing at the same rhythm as GDP — nothing even close to the same rhythm, actually.”

Governments need to examine whether they are getting enough rents from oil and gas development, said Vaughan, and how to use those revenues in the difficult policy fields of human capital. They include education, innovation, infrastructure and productivity gains — the kinds of headache-inducing policy areas that have bedevilled Canadian governments for two decades.

With the global community committed to a low-carbon future, the comprehensive wealth report highlights the vulnerability of the country’s dependence on fossil fuels driving GDP.

“Unless Canada makes those investments in the human capital to make that bridge, we’re going to be left behind — and then this imbalance we’ve seen will only increase,” said Vaughan.

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Study: Canada’s national wealth overly reliant on oil, housing

  1. Not exactly earth shattering news. One of the larger problems with Canada’s oil and gas is that it is a raw product business i.e. relative to opportunity it produces the least amount of wealth per unit of effort and investment. When one considers that the most generous tax allowances and other government transfers happen at the base extraction level, the cash flow from government is maximized relative to GDP produced; a larger portion of the economic opportunity and advantage to government revenue is had when raw product is converted into intermediate product (e.g. polymer feedstock) and finished product (e.g. fuels). Simply exporting raw material exports jobs and GDP to other countries – this is of course possible when foreign/international corporations have been granted monopoly on natural resources: decision are based on corporate financial advantage rather than advantage to the country while policy is left to the NEB, for the most part an old boys club for representatives of the fossil fuel industry. Prior to the recent oil glut, the fossil fuel industry was absorbing a significant portion, sometimes half, of all investment capital in a given year; this was disadvantages as extraction and transport generates about 1/4 as much GDP per unit of investment as compared to other industry sectors and about 1/7th as many jobs. A downside to capital investment in this industry is that a substantial portion goes to Chinese steel and Korean heavy equipment (in spite of massive capital investment it did not prevent heavy equipment manufacturers from leaving the country). As a general rule, diversified investment is the best policy, consequently, it is likely wrong to deploy the largest portion of investment capital and/or government support to a single industry.
    Housing is a somewhat different story as it depends equally on personal capital spending and population; however, there is substantial distortion in urban centers that pursue densification policies where merely adding housing units the less productive policy of replacing existing housing stock with higher value multiple unit housing; this produces a smaller increase in housing units per unit of capital investment driving up unit market value creating dangerous overvaluation and increased financial risk. To a first approximation, housing demand should increase with population however with an aging demographic and attendant downsizing, sun-seeking etc demand will increasingly depend on foreign money (the current obsession with hot markets is likely a distraction from more critical issues). Certainly, current political concerns do not include whether or not there is adequate accommodation for workers or even the lost productivity due to price induced long distance commuting.

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  2. Actually Canada has been the leader in inovation when you consider Nortel, Research in motion, Bombardier to name three. Our concern should be ” why did we let our leadership in these fields fail”?
    Are we Canadians relegated to be hewers of wood and drawers of water indefinitely? The answer!
    Get as much of our resources to market now while there is a demand and use the royalties from those resources to support industries that produce an end product.