By Don McIver
In the never-never land of government-inspired “economic development,” a sprinkling of pixie dust and a new name can rehabilitate discredited old ideas. Despite its dismal record at picking “winners” such as the Bricklin sports car, the New Brunswick government has recently decided to mould business “clusters” across its industrial landscape in the form of the “Plastics Valley” of North America.
Haven’t heard of Plastics Valley? Everyone knows about Silicon Valley — a “cluster” of interconnected high-tech industries in California. Back in 1997, two studies concluded that Canadian plastics manufacturers enjoyed relatively low operating costs, prompting then-premier Frank McKenna to assert that “compared with 24 prime plastics-production centres in North America, our province offers the lowest annual operating costs.” One study, commissioned by the New Brunswick government, showed New Brunswick to have the lowest costs. North America’s “Plastics Valley” was only a government press release away.
Such views are an “extrusion delusion,” as put by Isaiah A. Litvak, a distinguished business academic in a recent study for the Atlantic Institute for Market Studies. “The New Brunswick government believes that the plastics products industry could become an important engine of growth in the province’s manufacturing sector. That is not going to happen.”
As Litvak points out, the comparison is fatally flawed; Canadian industry is typically composed of small and medium privately held firms engaged in quite different operations with a far smaller average workforce and requiring different skill sets than the American firms with which they were compared.
One 1997 study assumed a typical company workforce of 90. The other — the one the government commissioned — assumed 300 workers. The AIMS paper pointed out that the industry association estimated that there were only 800 persons employed in 1997 by the entire industry of 40 plastics manufacturers in New Brunswick. The average North American plant actually employs 50 workers.
Similarly, the essential factors needed to support the development of a plastics cluster were notably deficient in New Brunswick. Poor availability of skilled workers and short-term job attachment resulted in an ill-equipped labour force. Litvak found a dearth of training facilities, few local capital sources and a location remote from suppliers and major markets.
Nevertheless, based on the faulty data, the New Brunswick government wasted no time pitching its case to some 5,000 American plastics companies. And the upshot? Since that fevered enthusiasm over the province’s lean mean plastics competitiveness, several firms have closed-down their New Brunswick operations and only one significant new entry, employing 80 low-skilled people, has opened. To attract that one firm, various levels of government aid were provided:
- a $600,000 forgivable loan on the promise to create 80 jobs;
- a $1-million interest-free loan from Ottawa’s Atlantic Canada’s Opportunity Agency;
- up to $200,000 in wage subsidies from N.B.’s training program;
- 12 acres of free land worth $300,000, plus about $500,000 of in-site preparation from the city of St. John; and
- temporary office space and project implementation support.
Today, New Brunswick accounts for about the same proportion of the country’s plastics’ industry as it did in 1997 — 1%!
Undaunted by the dismal results of the plastics escapade, New Brunswick is still tempted by the notion that governments can pick the industries of the future. Last year, the government of Premier Bernard Lord introduced a 10-year “prosperity plan” where the virtues of clustering are yet again touted for the province’s under-performing economy. In fairness, the plastics experience may have chastened the government to some extent. The plan says clusters should be market-driven and private sector led. There is even a proposed “Strategic Clustering Initiative” to be led by the private sector. Today, however, no one in the provincial government has been able to identify the private sector people leading this initiative.
Clusters that develop spontaneously in response to market forces can be potent engines of growth. But, markets are complex. Would any of us be comfortable letting a government official decide which investments we acquire? What makes bureaucrats believe they are better than the market at guessing which industries are likely to cluster? The government denies that the new proposals are about picking winners or losers. But how on earth they expect to provide support to identified clusters without doing precisely that is a mystery.
Real prosperity policy is a long hard unglamorous slog — creating the right tax policy, infrastructure, skills and education that unknown entrepreneurs will put to work in unpredictable ways to create value for anonymous customers in far off places. If the New Brunswick government wants more clusters, it needs to stick to its knitting.