How to fix southwestern Ontario’s economy – by Mike Moffatt (Canadian Business Magazine – August 27, 2013)

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No silver bullet, but a salvo of ideas.

While the national unemployment rate currently stands at 7.2%, some regions are suffering more than others. Southwestern Ontario is one such place, with Windsor and London showing 9.2% and 8.6%, respectively. And so, as a business school economist in London, Ontario, it isn’t surprising that the question I’m most frequently asked by non-economists is some variant of “How can we grow southwestern Ontario’s economy?”

My first response is to point to some recommended reading on the topic, including several research papers by the Mowat Institute (see here, here and here). I’m also looking forward to coming recommendations from the Ivey School of Business’ Lawrence Centre which is working on a number of regional research projects. (On the other hand, if I’m at a cocktail party and feeling glib, my response is similar to that which I gave in the middle-class roundtable.)

But there is no silver bullet—it will take a suite of smart policies and a willingness to experiment. That’s the short answer. The longer answer is not policy prescriptions per se, but rather things we should be mindful of when developing and promoting policy ideas.

Support at the industry level should be general and based on real comparative advantages. Identifying the region’s well-positioned industries is an easier task than identifying companies, particularly when examined from the point of view of comparative advantage. Among other features, southwestern Ontario is geographically close to a number of major U.S. markets, has an excellent higher education system, a strong financial sector, strong manufacturing cluster and some of the best farmland in the world.

There are ways to support industries backed by these comparative advantages without resorting to direct subsidies. Regulatory harmonization and ensuring open borders with the U.S. must be of vital importance. And ensuring pork farmers, for example, have access to European and Asian markets should be a goal of international trade negotiations.

When discussing industries, we must be wary of arguments such as “green energy is the future, so it makes sense for the government to invest there.” But what form is this government investment taking? What are the costs? Does the region have useful comparative advantages that would ensure industry survival? I find the Public Policy Keltner List useful for answering these questions.

Governments are awful at picking winning companies. Let the market figure out which companies will succeed. Providing corporate welfare to rich business people simply worsens the region’s inequality problem. We need to look elsewhere for answers.

Strong, but smart regulation can improve export opportunities. There is a common belief that there is always a trade-off between regulatory strength and economic growth. This doesn’t have to be the case. Strong regulation can sometimes be a comparative advantage when exporting products. The best example of this is consumer safety regulation in agriculture. Food safety is a top-of-mind concern among the middle-class in large, emerging markets such as China and India. (One only need consider the 2008 Chinese milk scandal for evidence).

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