Revitalizing Atlantic Canada

Regional subsidies dramatically increased in the 1970s and Atlantic Canada’s economic growth began to falter

By Don McIver

The need to revitalize Canada’s under performing Maritime economies is garnering little attention during this election campaign. Thank God. Far better the focus be on the state of health care, the tax-spending balance and even the needs of municipalities.

For decades, federal politicians have shown up at election-time, declaring they are “here to help,” thus presaging a disastrous policy outcome. Their well-meaning efforts, with promises to close the prosperity gap with the rest of the country, have retarded the Maritimes’ economic convergence with the rest of Canada.

A few weeks ago, the Atlantic Institute for Market Studies released a comprehensive study detailing the perversity of such programs as Employment Insurance, which subsidizes seasonal work, discourages education and causes labour shortages; an equalization formula that discourages local initiatives and distorts taxes; and the regional development arm of Ottawa, the Atlantic Canada Opportunities Agency (ACOA), through which the taxes of successful businesses are used to subsidize the unsuccessful.

For too long, “economic development policy” has been based on the government-knows-best model — a concept that presumes mandarins, rather than entrepreneurs and investors, are the best judge of which business opportunities should be capitalized.

The argument for government intervention is based on the erroneous presumption that markets just aren’t working in this region. Government planners believe that investors are somehow systematically ignoring profit-making opportunities — opportunities that planners funded by Ottawa can identify and nurture.

This vision of how to achieve growth and convergence is dead wrong. It is contradicted by international experience and by Atlantic Canada’s own history.

In the postwar era up to 1971, Atlantic Canada’s per-capita economic growth was strong, consistently outpacing the rest of the nation. Then, when Ottawa dramatically increased regional subsidies in the early 1970s, the region’s growth began to falter. The reason is clear: Bureaucrats have neither the insight nor the experience to choose winners more effectively than the marketplace, and the track record of grants and loans targeted at specific projects is decidedly spotty.

Bricklin Motors is one of the most famous examples. Lured by millions in loans guaranteed by the province of New Brunswick, an American sports car producer opened up shop in the province in the 1970s only to go bankrupt, leaving taxpayers to foot the bill.

Another example can be found in Nova Scotia’s Sydney Steel Corporation, which received $275-million in government financing in 1987 to no avail. The company’s plant fell into the hands of the Nova Scotia government, which eventually had to sell it at great cost to taxpayers.

Adding insult to injury, there is a real risk that publicly subsidized operations drive competing firms created with private capital out of business.

More unsettling is the use of ACOA to serve political objectives. When it was created, ACOA was intended to be the lead agency in the region — the “local face” of the federal government so-to-speak. Having Ottawa pour tons of money into the region, during the lead-up to an election or at the time of a potentially unpopular policy decision, could be advantageous for the incumbent government, no matter what its political stripe. More particularly, it could be a boon for federal politicians either elected by a slim majority or those elected in response to a previous government’s mishandling of key regional policies.

A recent C.D. Howe Institute study shows that ACOA spending appears to have been ramped up during the run-up to elections — no matter whether the Conservatives or the Liberals were in office. During the 1994-2001 period, ridings represented by the governing Liberals benefited more than other ridings from ACOA commitments, and the agency also displayed a marked preference toward ridings where the Liberal MP’s margin of victory in the preceding election was relatively narrow.

The openly politicized nature of ACOA’s intervention was inadvertently revealed in a recent response to a report in the Fredericton Daily Gleaner. In the first three weeks of May, the agency, reports the Gleaner, was “pumping out announcements and money at twice the pace of a year ago.” An ACOA spokesperson quoted by the paper explained that ACOA’s policy is not to make new announcements during the actual campaign, nor, indeed, until the incoming minister was confirmed — commitments had to be accelerated before the election was called. So much for the notion that financial assistance is based solely on a neutral, quantitative assessment of community needs.

There are concrete alternatives to ACOA. Lowering tax rates for all businesses, rather than relying on stimulative government spending, would remove the politics from regional development activity. Profitable businesses could then keep a larger share of their revenues, automatically rewarding successful enterprises and encouraging them to become even more successful. Government would no longer need to — or be able to — choose winners.

Regionally differentiated federal tax rates or possibly an Atlantic investment tax credit could achieve this goal. Alternatively, the Atlantic provinces could achieve additional fiscal flexibility if federal government absorbed some provincial debt. The important objective is to develop a broad, tax-driven means of encouraging business development in Atlantic Canada — not one that targets particular industries or firms. That will help bring Atlantic Canada back into the economic mainstream.

Don McIver is the director of research, Atlantic Institute for Market Studies

© National Post 2004