Ted Morton, University of Calgary School of Public Policy, and Meredith McDonald have published The Siren Song of Economic Diversification: Alberta’s Legacy of Loss as SPP Research Paper No. 8-13. Here is the abstract.
Download the paper from SSRN at the link.
Former Alberta premier Peter Lougheed is celebrated for his defence of the province and Western Canada during the energy wars of the 1970s, and deservedly so. Prime Minister Pierre Trudeau was a formidable opponent. He was able and willing to use the full arsenal of federal powers to redirect soaring western energy revenues away from Alberta to Ottawa. For those of us in Western Canada, it is unpleasant to imagine what the outcome of this struggle would have been if a lesser man than Peter Lougheed had been at Alberta’s helm. But there is another aspect of the Lougheed legacy that is less remembered because it is less celebrated — also deservedly so. These were Lougheed’s ambitious economic diversification projects. Between 1973 and 1993 (when Ralph Klein became premier), the Lougheed-Getty “forced-growth” economic diversification projects are conservatively estimated to have cost Albertans $2.2 billion. While former premier Don Getty got most the blame for these losses (as many occurred during his watch), most of these programs began earlier. Lougheed’s push for government-led diversification of the Alberta economy was a policy hallmark of his 1971 electoral breakthrough, and marked a sharp break from three decades of Social Credit laissez-faire policies.
The Lougheed-Getty diversification fiascos are of more than just historical interest. While the subsequent Progressive Conservative (PC) regime of Premier Ralph Klein (1993-2006) followed an explicit philosophy of “government is not in the business of business,” the more recent Stelmach (2006-11) and Redford (2011-14) governments have not.
Both have embraced government-sponsored “value-added” and diversification initiatives, including the North West Redwater Partnership upgrader and two new endowments to provide “funding for social and cultural innovation, and agricultural innovation.”
As Alberta’s fifth premier in the past nine years, Jim Prentice, takes the helm and tries to restore some stability to Alberta’s public finances, it merits revisiting the Lougheed-Getty experience for lessons learned. Our read of their record cautions against going down the same road again. While we identify several successes (e.g., Syncrude, Alberta Energy Company, and the ethane-based petrochemical industry), these were mostly in the hydrocarbon energy sector, and so contributed little to diversifying Alberta’s economy. Our analysis identifies the largest dollar losses (the “Dirty Dozen”), several of which suggest that failure to control costs is endemic to government-led projects. Last but not least, the sheer number and diversity of government-funded projects reflects an unhealthy culture of corporate cronyism. With billions of dollars sitting in the newly created Alberta Heritage Savings Trust Fund earmarked for “diversification” and “capital projects,” the temptation to spend became irresistible. The Heritage Fund, rather than serving its original purpose of a long-term “rainy-day account,” became a giant slush fund for ministers’ pet projects. The result is that, in real dollars, the Heritage Savings Trust Fund has a lower net worth in 2015 than it did in 1987.
By the time Klein won the leadership of the PCs in 1993, his predecessors had racked up over $23 billion in net debt. Klein is widely celebrated by some (and criticized by others) for the harsh budget cuts he made to eliminate the structural deficit he inherited. Less well known is that the Klein team also terminated almost all the Lougheed-Getty diversification and stimulus programs. In their stead, the Klein governments — under the leadership of treasurers Jim Dinning and Stockwell Day — pursued a diversification policy based on macroeconomics: making Alberta the most tax- competitive jurisdiction in Canada. This “build-it-and-they-will-come” approach was intended to attract both financial and human capital. This approach has enjoyed modest success thus far, as witnessed in the growth of the financial services sector and the relocation of many corporate head offices to Calgary. It is clearly a lower-risk path to sustained prosperity than the ill-fated, government-led “forced-growth” initiatives of the Lougheed-Getty era.
Download the paper from SSRN at the link.