If Ralph Klein were a stock, you might notice something peculiar about its behaviour. When the price of oil was low, the price of Ralph would be high. But the reverse would also be true; when oil prices soared, the demand for Ralph would fall.
What explains this curious relationship? Nothing should be easier in a resource-rich province than being premier when the good times roll, and nothing more miserable than dealing with the aftermath of a price collapse of your main resource. The price of Ralph and the price of oil should move in lock-step, shouldn’t they?
Not at all. A massive natural resource endowment can be a curse, not a blessing.
Few of the world’s most vibrant economies have many natural resources. Many of the richest -Japan, Denmark, Switzerland, Germany, France, Taiwan, Korea -are resource poor. The same is true within countries. In the United States, resource-rich Texas and Louisiana have lower incomes than resource-poor Connecticut and Massachusetts.
Mexico and Nigeria both went bust in the 1980s after oil price rises hugely increased the value of their resources. Prominent economist Jeffrey Sachs notes “resource abundant economies [tend] to lag behind resource scarce ones.”
Why? Not least because natural resource revenues feel like free money. The residents of the jurisdiction that has those revenues didn’t do anything to put them in the ground. God did that. Sure, they have to work to extract them, but that actually doesn’t require all that much work relative to the value of the resource when prices are high.
And as every lottery winner quickly discovers, spending a windfall wisely is no easy matter. The reality is that when oil prices are high, the undisciplined in oil-rich jurisdictions spend their time fighting over the spoils. Everybody wants some of that money because since hardly anybody had to work to earn it, nobody has a better claim on it than anybody else. Everybody’s pet scheme suddenly becomes feasible. Things get fractious. Huge oil revenues are the apple of discord.
But what goes up must come down, and the crash follows the oil boom as the wind follows a billowing sail. Ironically, the crash is a unifying force. People quickly realize that they have been on an unsustainable credit card binge and their income has fallen. They need to work off the debt and get spending under control.
That’s where Ralph came in. He rallied Albertans in the oil price trough (around US$20 in 1992) to the cry of living within their means. And he has been forced out as oil prices reach dizzying heights (around US$66 this week) because he’s not providing effective leadership about how to manage the province’s burgeoning wealth.
What Ralph proved is something he does not himself grasp, namely that you can get everyone on board for an even-handed policy of saying no to virtually everyone, but the reverse is not equally true. Since even in Alberta money is not infinite, not everyone gets what they want. Saying yes to some people’s pet schemes creates anger and resentment for the losers and rising expectations for the rest. Since not everyone can be satisfied, just spreading the money around to the squeakiest wheels either drags you incrementally to ruin, or forces you at some point to reverse course. The richer you are, the deeper you are likely to descend into the quagmire before reality bites.
Getting the politics out of natural resource revenues is the only long-term solution. Few jurisdictions have done so successfully. Norway is one. Alaska is another. In Alberta it depends on where they are in the oil price cycle.
Because they represent public assets, and not ordinary income like income or sales taxes, natural resource revenues should be used exclusively for two things. One is debt reduction. When you are heavily indebted, it makes sense to sell assets to reduce interest payments and free your income up for more productive purposes. Ralph thus did the right thing eliminating Alberta’s debt and lowering taxes. After that he ran out of good ideas but not, alas, cash.
Peter Lougheed showed the way on the other proper use of this money: heritage or legacy funds. These are not “rainy day funds,” which simply cause everyone to break out their umbrellas. There must be a legal obligation to invest the capital, spending only the income it generates. That smoothes out the huge fluctuations in natural resource revenues, while creating an asset that can also be invested in things that confer long-term benefits, like genuine infrastructure, medical research, and properly endowed universities.
That’s why, if Albertans are smart, their next premier will forswear gimmicks in favour of a credible plan to treat natural resource revenues like the precious assets they are, rather than a cash windfall to be squandered before the crash. That is the meaning of Ralph.
Brian Lee Crowley is president of the Atlantic Institute for Market Studies (www.aims.ca), a public policy think tank in Halifax. E-mail: BrianLeeCrowley@aims.ca