Resource Rents, the Ring of Fire and the Future – by Livio Di Matteo

Livio Di Matteo is Professor of Economics at Lakehead University in Thunder Bay, Ontario.  Visit his new Economics Blog “Northern Economist” at http://ldimatte.shawwebspace.ca/

May 9, 2011

American historian David Potter’s book People of Plenty argued that resource abundance shaped the American attitude towards possibility and opportunity.  Abundant resources set the stage for wealth accumulation and created a society that believes that everyone can become rich through their own work and effort and that initiative and opportunity are the key to social mobility and success. 

In Canada, we also have a tradition of resource abundance but it has generated not so much an ethos of aggressive individualism but one of more government involvement in the economy.  Indeed, the resource rents from natural resources have played a role in government finance whether it was late nineteenth century Ontario’s forest sector (which generated at its peak 20-25 percent of provincial government revenues) or energy in Alberta and Newfoundland and Labrador today.

As Herb Emery and Ron Kneebone have recently written in Alberta’s Problems of Plenty (May 2011, Policy Options), in the Alberta context the main role of resource abundance and resource rents has been to augment both private and public consumption.  Emery and Kneebone detail how the heavy reliance on resource exploitation carried with it the problem of large swings in economic activity – boom and bust – which can play havoc with health and education spending if short-term resource revenues are funding unsustainable increases in program spending.

They argue that the solution to this problem is to redirect revenues from natural resource rents away from current government operating budgets and into savings.  This would build endowments that would fund spending in the future in a stable pattern pointing to the successful employment of this approach by energy rich Norway.  Alberta has only saved about 10 percent of the natural resource revenue it has collected whereas Norway has saved over 90 percent.

Such a policy appears to have eluded not only Alberta, but indeed, most Canadians who at various points in their history have been the beneficiaries of major resource booms.  Why we have been unable to save and invest a larger share of our natural resource rents over the last century is an interesting question.  Given that personal saving rates have also declined over the last two decades, do Canadians in general simply have a high rate of time preference – that is, they prefer immediate gratification? 

We used to have higher savings rates before.  Could it be Canadians preferred the benefits of natural resource revenues to accrue to current consumption so that they could save more privately?  Perhaps the best way to save and invest resource rents is to dedicate the endowment fund for a particular purpose.  We may be averse to simply stockpiling resource revenues into a general fund.  Why not create dedicated public endowments out of natural resource revenues– like one for health care, one for education, etc…  In the case of health care, this could be a form of pre-funding health expenditure.  Provinces like Alberta, Saskatchewan and Newfoundland & Labrador are certainly well positioned to try this out.

In Ontario, the proposed Ring of Fire may also generate new resource rents down the road.  Given that one hundred years of forestry and mining revenues were never used to generate a public endowment, perhaps we might try and get it right this time.  During the period from 1870 to 1920, resource rents from forestry and mining in Ontario – in particular, Northern Ontario – generated a large chunk of the revenue for the provincial government which fueled public expenditures that benefited all Ontarians. If even a portion of this money had been invested in a permanent fund for the North, today it would be a massive endowment that could fund projects in the North on a permanent basis. 

The Northern Ontario Heritage fund that currently exists is but a pale imitation of such a fund because it relies on the government continually committing funds for it out of its operating budget.  As the North’s population share shrinks and our influence diminishes, one day the budget for the Heritage fund could simply vanish.  With the Ring of Fire, there will again be substantial resource rents.  We should advocate and plan now so that a share of these revenues are ploughed back into a permanent regional endowment to fund regional infrastructure and service for the long haul.

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