Provincialism hampers Alberta’s ability to diversify

March 29, 2010

By Robert Roach
Director of the West in Canada Project
Canada West Foundation

Robert Roach
Robert Roach

CALGARY, AB, Mar. 29, 2010/ — Long before anyone associated the cities of Kyoto and Copenhagen with carbon emissions, Albertans were wrestling with the idea of how to diversify our economy beyond oil and gas. The price volatility and non-renewable nature of our hydrocarbon resources has concerned us for decades. The current preoccupation with reducing greenhouse gas emissions only adds (no pun intended) fuel to this fire.

The problem is threefold: First, the oil and gas sector has been very, very good to the Alberta economy and provincial government coffers. Fortunes have been made, jobs and economic growth have been generated and an uneven, but very substantial flow of non-renewable natural resource revenue has kept provincial taxes low. Whether you like it or not, if you live in Alberta, you have benefited from the oil and gas sector (as have many Canadians who do not live in the province). It is hard to ignore the goose that lays the golden eggs.

Fear of government intervention in the economy

Second, we are (and rightly so) hesitant to artificially inseminate economic diversification via government intervention in the economy. Several classic government boondoggles haunt our past and a general bent toward letting the market decide these issues mean that government-led diversification has real limits in the province. Hence, we have tended to focus on things like education and low taxes as catalysts of economic activity. This approach makes sense, but it does not appear to be enough when it comes to true economic diversification.

Third, it is not particularly easy to design and implement effective economic diversification initiatives. The diversification puzzle is a tough one to solve.

So what do we do? Two key things spring to mind – one involves a change of mindset and the other requires putting some money where our mouth is.

With regard to the change of mindset, we have to break the headlock that the oil and gas economy has on our thinking. This does not mean that we abandon the oil and gas sector! But we have to pretend, as a thought experiment, that it doesn’t exist.

This will force us to think through the advantages and assets that remain in play in Alberta and how they could be harnessed to alternative economic activity.

If we keep saying things like “oil and gas are our bread and butter so let’s stick with what we know best,” new thinking will never get the attention it deserves.

In terms of a practical policy initiative, the government of Alberta should team up with the other western provinces and create a large pan-western venture capital fund managed by an arm’s-length private-sector firm dedicated to inexpensive financing for startups and commercialization ventures. The existing Alberta Ingenuity Fund, Alberta Heritage Foundation for Medical Research and Alberta Enterprise Corporation are a good start, but it is time to inject steroids into these sorts of initiatives and to work together with our neighbours in the region.

This is not, by the way, about picking winners or subsidizing businesses, but about backstopping lots of cheap venture capital for use by entrepreneurs based in the region. As such, governments and taxpayers must be willing to accept significant losses due to the inherently risky nature of startups and new product development.

Taxpayers do not much like it when a government-backed business venture goes bust or a research project that used public funds concludes by saying, “Well, that didn’t work.”

But this is exactly what we need to get used to if greater diversification is to take root.

If we are too timid, diversification will not happen.

Why a regional approach rather than one confined to just Alberta? A regional approach significantly expands the size of the field of play without introducing the complexities of a pan-Canadian approach and it increases the variety of ideas that will come seeking capital.

Just as we need to accept that failure is part of encouraging diversification, we need to get comfortable with the idea that focusing solely on Alberta is too narrow to get the job done.

Government’s primary role

It is important to keep in mind here that providing the foundation for economic activity is the primary economic role of government, not the direct promotion of economic diversification.

A highly educated, mobile and creative workforce, an efficient tax regime, superb management of our natural capital assets and a large stock of modern infrastructure should top the list of government’s priorities.

Nonetheless, there is a major role for government here, and a large regional venture capital fund could go a long way to cracking the economic diversification nut.

Channels: The Edmonton Journal, March 28, the Calgary Beacon, March 29, the Calgary Sun, April 4, the Flin Flon Reminder, April 14, 2010

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