HALIFAX] – “A devastating critique of regional policies with respect to Atlantic Canada after World War II.” That’s what Canadian Nobel Laureate Robert Mundell calls AIMS’ new book about government’s traditional role in the region’s economy. The book, Retreat from Growth: Atlantic Canada and the Negative Sum Economy, by former AIMS Senior Policy Analyst Fred McMahon, is being released today.

In his Foreword to Retreat from Growth, Professor Mundell, a member of the Institute’s Research Advisory Board, goes on to say,

This book ends with a number of policy recommendations that certainly demand close attention from economists and policymakers in government. Government spending and taxation should be brought into a “normal” range from their current inflated levels. ‘Diverting federal transfers from wasteful spending to tax cuts would create a magnet for investment in Atlantic Canada,’ although McMahon realizes that this reform would be fought by federal politicians: sending money earns more votes than tax cuts.

The book starts from the observation that Atlantic Canada has closed the disparity with Canadian prosperity at about half the rate predicted by both economic theory and the performance of other lagging economies in the US, Europe, Japan and the developing world. This poor performance is not due to a lack of government activity and spending in support of regional economic development. On the contrary, regional subsidies in various forms to Atlantic Canada have far outstripped those available to virtually any comparable lagging region in the developed world.

McMahon shows that Atlantic Canada’s GDP would be more than $1,700 higher for every man, woman and child if Atlantic Canada had simply matched the lower band of average growth for lagging regions in the developed world, whether in Europe, the United States or Japan — places where regional policies are either non-existent or tiny potatoes compared to Canada’s regional development programs.

“Economic development programs and regional transfers, far from boosting economic growth,” McMahon notes, “have politicized the economy, caused firms to focus on political connections rather than increased competitiveness, supported out-moded – and often dangerous and environmentally hostile – economic activities, driven out private sector investment, inflated regional costs, and reduced incentives to work or further education and training.”

McMahon’s book reveals a number of surprising facts about Atlantic Canada’s economy.

In many months, more people in Atlantic Canada collect employment insurance than are officially unemployed. Prior to UI reforms, twice as many people collected benefits as were officially unemployed in many months.
Despite double digit unemployment and tens of thousands of people collecting UI/EI, Atlantic Canada suffers labour shortages, even of unskilled workers, inhibiting the ability of business to expand and create year-round jobs.
Atlantic Canada’s fishery, far from a traditional activity, became a government artifice. Despite shrinking fish stocks and improving technology, two and a half times as many people were employed in the fisheries just prior to the cod collapse as there were in 1961.
Retreat from Growth is the companion volume to McMahon’s Road to Growth, published by AIMS in January of this year. In the earlier book, he laid out the very different experience of places as diverse as Ireland, Holland and Georgia in the U.S. South, in turning their previously lagging economies into economic powerhouses. The public policy approach adopted in these successful jurisdictions was summarised in Road to Growth:

They saw that trying to prop up dying industries was a mug’s game. Public debt needed to be brought under control, taxes lowered, and excellent value offered in public services when measured against the taxes paid. Politics needed to be banished from decisions about where and how to invest, whether in public infrastructure or private industry. Work incentives needed to be improved by reforming social welfare. Profitability in the private sector needed to be improved. And costs, including labour costs, needed to be kept keenly competitive. The sum of these measures was a policy environment in which business had every reason to invest and build productive capacity, while workers had every reason to work hard and build their job skills. As the capital investment grew and workers became more skillful, real wages rose along with tax revenues, and a virtuous circle was created. Growth bred more growth, success bred more success.

“The findings of this book suggest that federal policy reforms in the mid-nineties, such as tightening access to employment insurance, reducing spending on ACOA and tightening transfers to the provinces, albeit inadequate, were at least consistent with policies that have helped other lagging regions to escape from the economic doldrums,” according to AIMS President Brian Lee Crowley. “But recent signs of a reversion to the old failed policies — such as increased funding for ACOA and rolling back the already timid UI reforms — should be of great concern to anyone who wants to see Atlantic Canada achieve the prosperity of which it is capable.”

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For further information, please contact:

Brian Lee Crowley, President, AIMS,: (902) 499-1998; brianleecrowley@aims.ca

Fred McMahon, author: (416) 893-8893 (June 18-23 only); FredMcMahon@nextcity.com