Monday, May 22, 2000
The Globe & Mail

Atlantic Canada’s bind
Large federal subsidies and unemployment-insurance programs undermine real economic growth

New Brunswick Premier Bernard Lord has the rhetoric right about Atlantic Canada’s economic future: “We want a 12-month growth model, not a six-month seasonal economy.” But how likely is he to demand really ambitious actions to change the status quo? Unemployment insurance, for example.

Mr. Lord’s spirited claim that “governments and people in Atlantic Canada are working to break free of the bonds of dependency” appeared in The Globe and Mail last Tuesday, along with news that Ottawa will expand areas qualifying for seasonal benefits under unemployment insurance. Much of Atlantic Canada is already a specially designated area, permitting people employed in temporary jobs to claim 32 weeks of benefits after working only 12 weeks a year. That’s an improvement over the old “Lotto 10/40,” when the ratio of temporary work to habitual unemployment-insurance benefits was even more destructive to a “12-month growth model,” but it is still very much part of the problem in Atlantic Canada.

Several royal commissions and task forces have decried the program’s subsidization of short-term seasonal employment in Atlantic Canada, but no regional politician has called for corrective action. Instead, when the federal Liberals tightened up the system during their first term, there was an outcry from provincial leaders, and then the loss of Liberal seats in the following election. “Working to break free of the bonds of dependency” is not much on view.

But unemployment insurance is only part of the regional welfare trap that has held Atlantic Canada back for decades. Billions of dollars of federal money flow into the region for a dizzying array of emergency income-support programs, subsidies to big business, subsidies to small business and localized infrastructure programs, often used to help local people qualify for unemployment-insurance benefits. How often do we hear regional leaders complain about the debilitating social and economic effects of these subsidies over time? We might say never but for the Atlantic Institute for Market Studies in Halifax.

The institute recently published a book by Fred McMahon called Looking the Gift Horse in the Mouth: The Impact of Federal Transfers on Atlantic Canada. Here are some of its conclusions:

Massive federal subsidies effectively raise wage rates in Atlantic Canada, without allowing price increases to offset them. This overprices the region’s labour and undermines local investment. “With an increase in relative wages, not offset by price increases, private-sector investment should decline relative to the rest of Canada [according to standard economic models]. . . . It does. The rise in [unearned] regional wages would also lead to a demand shift away from regional production to externally produced goods. Data for Atlantic Canada’s net exports show this shift at the expected time. Finally, regional economic growth should stagnate, another prediction borne out by the data.”
“Over the last 35 years, Atlantic Canadian per-capita GDP growth has consistently and strongly outperformed Canada’s per-capita growth. Regional growth faltered only when various federal policy decisions deliberately and dramatically increased regional subsidies in the 1970s.”
Regional subsidies “make it more profitable for many businesses to pursue government contracts and subsidies than to strive to create marketable products. Government also has an incentive to support declining industries with a ready-made constituency and political contacts over emerging sectors and externally produced goods.”
“While regional subsidies have done the regional economy more harm than good, withdrawing from the dependency built up over the last 35 years will not be a painless process.” And it is unlikely to be led by provincial politicians there, whatever their insights into the problem.
Nevertheless, Mr. Lord makes the right noises about better education, improved infrastructure and less dependency on subsidized short-term, low-skill work and unproductive businesses. The trick comes in getting a good return on forward-looking investments while destructive old policies continue to sap the region of its underlying social and economic strength.

The government of Newfoundland and Labrador continues to insist that its nickel resources be developed in a manner that is uneconomic for the company that holds the rights — a throwback to the worst experiences of earlier times. So the resource remains in the ground.

The Atlantic premiers recently complained about declining air services — surely not suggesting that uneconomic routes be created through subsidy, too?

With net federal transfers accounting for almost 20 per cent of Atlantic Canada’s GDP, it will take time and skill to crawl out from under the weight of the “gift horse,” and all the errant assumptions that come with it. The new Council of Atlantic Premiers has a politically difficult job ahead of it, assuming that it accepts the analysis of what really needs to be done.