Alberta tried economic diversification – and failed

With the price of oil plunging to below $50 per barrel and the outlook for Alberta’s economy and provincial budget revenues falling in tandem, an oft-heard piece of advice is being recycled: Alberta should diversify its economy.

The advice is well-intentioned, but local economies, like businesses, often make money selling what’s nearby. Hawaii peddles vacations with warm weather attached. Alberta (along with Saskatchewan, Newfoundland and Labrador and northern British Columbia) sells oil and gas.

The oil, gas and mining sector is the largest contributor to Alberta’s economy at 23% of the province’s GDP. That is significant for employment and income. That sector also matters to the provincial budget: resource revenue provides about 24% of the Alberta government’s own-source revenue.

In theory, diversification would allow Albertans to be less reliant on resources. However, it’s not clear how Alberta could diversify simply by everyone wishing to that end, including via government policy.

For example, consider an Edmonton supplier of oilfield equipment to the oil sands. During a downturn in demand, it’s no easy task for that same business to sell chopsticks to China instead of pipes, chemicals and water services to oil fields up a nearby highway.

As for policy, the Alberta government tried to diversify the provincial economy in the 1980s and early 1990s.

Starting under then-Premier Peter Lougheed and also under his successor, Don Getty, the provincial government provided loans, loan guarantees and equity stakes to companies in the non-energy sector, such as “made in Alberta” banks, trust companies and investment firms.

After the early 1980s recession and then a mid-decade collapse in oil prices (to $10.25 a barrel in April 1986, down from $26 in December 1985) Alberta’s real estate values also plummeted. That took down many of those same provincially guaranteed financial institutions, which had heavily invested in real estate.

The price tag to the provincial government for that diversification effort was $1.8 billion resulting from failed loan guarantees to partially covered consumer and investor deposits.

In another diversification attempt, the province loaned, guaranteed, and took equity partnerships in everything from a forestry company to a meatpacking plant, a provincial bitumen upgrader, a waste treatment plant and a hi-tech company. By the early 1990s, defaults and foregone capital investments from all of the above cost the province $2.2 billion – in addition to the $1.8 billion financial sector collapse.

These efforts didn’t help Albertans adjust to a new reality or diversify the economy. It was simply activist industrial policy, where governments pick winners and losers. The latter cropped up more regularly than the former.

Diversification can be useful; high-tech, manufacturing and banking have boomed in Texas for example and thus provide more opportunities for people in that state.

But economic growth and public benefits – increased employment opportunities, for example – result from getting the basics right: low business and personal tax rates, a flexible labour market, and other advantages that attract investment. Alberta, especially after the mid-1990s, has had these advantages in spades relative to other provinces.

That may explain why, even with a 20-year look, Alberta’s unemployment rate has been consistently low, particularly when compared with other major provinces. Between 1994 and 2013, Alberta’s average annual unemployment rate has been just 5.4% through bust and boom and bust again – despite the highest interprovincial in-migration of any province in the same period.

In contrast, the more diversified BC economy has suffered an average annual unemployment rate of 7.3% in those two decades, with Ontario’s at 7.4% and 9% in Quebec.

Diversification might help smooth out government revenues in some years, but it can’t guarantee a more robust economy or lower unemployment rate. In reality, diversification may be less critical than most people think.

Visit www.fraserinstitute.org. Twitter: @MilkeMark. This column is distributed by Troy Media (www.troymedia.com).