The Staple Theory
The Staple Theory
The Staple Theory
March 2014
www.policyalternatives.ca
RESEARCH
ANALYSIS
SOLUTIONS
ISBN978-1-77125-114-3
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Contents
In my job as economist for Unifor (and before that the CAW), I have had a
long-time interest in more sustainable and sensible policies for managing
Canadas resource wealth. The challenge, given the lucrative but fleeting nature of resource booms, is to leverage Canadas resource wealth in a manner that stimulates a more diversified, inclusive, and sustainable economy.
Market-driven approaches, reinforced by the rules of free trade deals (including, in particular, the still-unprecedented energy-sharing provisions of
the NAFTA) predictably leave us with a skewed, polarized, fragile, and unsustainable resource-addicted economy.
Last spring, I was giving a presentation at a conference in Sarnia, Ontario about the bitumen boom, the economic and social dangers it poses to
Canada, and the wasted opportunities Canada was missing by failing to proactively manage resource developments with an eye to diversification, industrial development, social well-being, and environmental sustainability. At
the end of the slide show I provided a list of key references for further readingsincluding a link to Mel Watkins classic 1963 article: A Staple Theory
of Economic Growth (Canadian Journal of Economics and Political Science,
29/2, pp. 4973). That article applied and updated Innis original analysis of
the role of successive waves of staples in Canadas economic development.
context for the publication of the original article, the antecedents of staples
theorizing in Canada, and Mels enduring influence as both a scholar and an
activist. The second section (with commentaries from Alberto Daniel Gago
and Gerry Helleiner) discusses the international influence of Mels work on
development theory and practice in the rest of the world. The third section
includes four commentaries applying Mels staple theory to the overarching challenges (economic, social, and environmental) raised by the bitumen
industry in Canada. Contributors to this section include Thomas Gunton,
Gordon Laxer, Daniel Drache, and myself. The fourth and most diverse section of the compendium reflects the incredible potential for applying staple
theory to other questions and problems in economic analysis and policy.
The range of topics covered in this sectionenvironment, gender, natural gas, Quebecs economic history, industrial policy, and even the financial
industryare testimony to the incredible and enduring relevance of staple
analysis to the role of dominant export industries in a countrys economic trajectory. The contributors to this section are Brendan Haley, Marc Lee,
ric Pineault, Marjorie Griffin Cohen, Dan Ciuriak, Daniel Poon, Alistair and
Sheila Dow, and David Wolfe. Finally, we give Mel Watkins himself the final
word, with a rejoinder that reflects on the 50-year legacy of his 1963 article, and engages with typical passion regarding the environmental consequences of unbridled petroleum exploitation.
I thank all of the authors for their generous, thoughtful, and high-quality contributions, which together constitute a significant and relevant body
of research and analysis on the current state of staple theorizing in Canada
and around the world. I also thank the Canadian Centre for Policy Alternatives for their cooperation in publishing the collection.
Through this series, all the contributors are saying a special and personal thank you to Mel Watkins for his important theoretical and personal contributions (in economics, and in so many other areas of life) to building a better Canada.
Part 1: Historical
Pedigree
All theories retain the genes of their parents, and likewise the Staple
Theory. The time was the early 1960s, the heyday of economic history at the
University of Toronto. Harold Innis had died a decade earlier, but his legacy was alive and well. He had artfully overridden disciplinary boundaries
in his books to focus on Canada as a society: the way it was conceived and
nurtured. He showed how natural resources (staples) had played a central
role throughout.
Innis had been impatient with the history written by his predecessors.
Histories of early Canada regaled the country as a bastion of the British Empire, a bulwark against the ambitions of the French and of the Americans.
Historically, Britannia ruled Canadian minds as much as it ruled the waves.
The historical literature on the fur trade at the time floated on an aura of
purple prosefur traders at sunrise paddling along the great rivers, singing in three-part harmony. It was the world of Cornelius Krieghoff but flying the Union Jack.
Economists in turn saw all this through still narrower lensesnamely, through the binoculars of supply and demand. Staples with distinct-
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ly different physical characteristics and very different histories, say fur and
timber, all became commodities, homogenized under the denominator
price. Rivers, mountains and prairies were screened as differential transport costs. Generally speaking, economic analysis pictured Canada as comprised of various shades of staples grey.
For Innis, who had personally canoed the old fur trade routes, had served
as a deck hand on the steamers of the Yukon, had worked on the fishing
boats of the Maritimes, this approach yielded a bloodless one-dimensional
Canada. It hardly reflected the country that he knew first hand.
Innis did have a deep appreciation of the industrial achievements of modern capitalism (which he abbreviated as the price system) but he sensed
that neo-classical economics fell badly short in its portrayal of the country.
When he was in graduate school in Chicago, Innis had been influenced by
the work of Thorstein Veblen. Innis claimed later that Veblen had waged a
constructive warfare of emancipation against the tendency toward standardized static economics, and against the inclusiveness of price economics.
Innis searched for an alternative focus:
Perhaps the most serious obstacle to effective work in Canadian economics and
economic history is the lack of a philosophy of economic history applicable to
new countries Much of the work has been defective through the attempt to
fit the phenomena of new countries to the economic theory of old countries.
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ples production had become more complex: it now required industrial equipment. Wheat production required tractors and harvesters; mineral production required elaborate mining machinery. How to take advantage of these
opportunities?
There were further possibilities. Instead of simply digging things out of
the ground and exporting them in their raw state, economic growth could
come from further processing of these raw materials. Softwood lumber could
be turned into paper by constructing paper mills. Flour mills could (and
should) process the wheat into flour; steel mills should process the iron ore.
Who would take up these industrial opportunities?
Here, Watkins argued, lay the key to the transition into industrial
growththe industrial linkages that staples production offered. He called
these backward linkages for the machinery to produce the staples and
forward linkages that could provide for further processing. Moreover,
additional jobs were thereby provided (including to the immigrant population), and this in turn expanded the consumer goods industries that followed in the wake of these linkages. Canada (with some qualifications) could
be held up as an example of how these linkages could work to foster industrial growth at least for some staple-reliant countries.
But little of this would have actually occurred in a laissez-faire society,
where industrial imports from an adjacent economy might have swamped
the fledgling domestic industries responding to the demand for the products of these backward and forward linkages. These new industries were
sheltered in Canada behind a tariff wall. Local manufacturers did seize
the opportunities on their doorstep and created an industrial base for the
country. (We will have to bypass here the later debate on efficiency and
supposedly suboptimal growth through import substitution.) In the postwar period, as Watkins pointed out, Canadian business was often slow on
the uptake, and alas foreign owners garnered many of these industrial opportunities.
Other staples-oriented theories followed in a similar vein, although
they were not necessarily offshoots of Watkins original article. Eric Kierans
directed attention to the question of capturing the rents connected with
natural resources. Charles Kindelberger had earlier addressed the different
effects of staple exports on the balance of trade and on the growth of the
domestic economy. Albert Hirschman pointed to the fiscal consequences
of staple production, and this was followed by the diagnosis of Dutch disease (analyzing the effect on the exchange rate and hence on manufacturing in major staples exporting countries.)
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Environmental consequences as well began to loom large in the discussion of staples. These were often devastating: the clear-cutting of forests,
the pollution of the atmosphere, and (more recently) the moonscapes of
the bitumen fields.
Today, tracking the broad consequenceseconomic, financial, political and environmentalthat flow from a reliance on staples production still
follows the broad Innisian tradition, although in a more critical vein. Further, the challenge of finding a national balance between staples and manufacturing remains a perennial theme of debate.
Innis was right many decades ago to place staples in the forefront of the
discussion of Canadian economic history. He thereby provided an antidote
to the dominance of the sycophantic and the romantic in Canadian history.
Instead, he grounded that history in an analysis of staples that had been
hidden in plain sight. The ramifications of staples production were spread
far and wide, linking not only the economy but shaping the society as well.
This is what Innis discovered, and thereby found a way to remove the blinkers of neo-classical economics through his staples thesis.
Watkins renewal of this discussion fifty years ago was an antidote of
a different sort. He pointed out some active directions for policy makers to
pursue in staples production. In this case it was an antidote to the conventional approach to managing staples with invisible hands. These hands
had in fact become so invisible that they were in danger of rendering Canada a paraplegic.
This challenge is still clearly with us today, evidenced both by the reluctance of Canadian business leaders to develop value-added industries
here, and the lack of imagination of policy-makers to push them to do better. In this regard, we give Watkins (1963) the last word:
Economic institutions and political values, an inefficient structure of industry combined with an unwillingness to do anything about it, have in the
past prevented Canada from growing at a satisfactory rate in the absence
of a strong lead from primary exports, but this need not be true in the indefinite future.
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Mel profoundly influenced the intellectual development of Canadian political economy over the course of more than four decades. The scope of his
work ranged from theoretical writings on the staple thesis; analysis of foreign investment, the multinational corporation and international trade; observations on the state of Canadian economics and political economy; commentaries on a range of political issues; and reflections on technology. The
themes addressed and the arguments made continue to resonate and offer important insights into the nature of Canadian political economy today.
His contribution to Canadian political economy is, or will be, apparent
to those who have an opportunity to read his work. Less well known, except to those who had the good fortune to enrol in one of his courses, is his
influence as a teacher and mentor to undergraduate and graduate students
at the University of Toronto.
Our association with Mel dates from the early 1970s at a time when
the Department of Political Economy was a rarefied, if not rather strange,
place. In the politically-charged atmosphere of the Vietnam War period, it
was not unusual for incoming undergraduates to be familiar with the Waffle Movement, the Committee for an Independent Canada and the findings
of the Watkins and Gray Reports on foreign ownership, or to read regularly Canadian Dimension and The Canadian Forum. Eager first-year students
in search of their lecture hall in Sidney Smith Hall ran the gamut of newspaper sellers from a wide range of political parties and factions of the day.
Most of the writings of Marx, Lenin, Mao and Tim Buck were available for
purchase. Rare times indeed.
Once acclimatized to the University of Toronto, it was possible to find
a number of courses scattered through various academic departments that
dealt with the issues pertaining to the New Left. This was less true in the
Department of Economics; however, Ian Parker was a source of inspiration
and two faculty members had definite name recognition: Abraham Rotstein
and Mel Watkins.
Despite the presence of Parker, Rotstein, Watkins and others, pursuing
an alternative program of study in Economics grew more difficult as the neoclassical orthodoxy extended its grip on the former home of Innis and Easterbrook and the Keynesian consensus crumbled. The Political Economy Course
Critique for 1973/74, published by the students association, observed that
Numerous students emphasized the need for courses on the exploitation of
multi-national corporations or on Marxist economic theory. Lest students
criticisms be shrugged off by faculty and administrators, they were accompanied by a warning: We, the editors, sincerely hope that this course cri-
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Everything I know I learned from Mel Watkins and Abraham Rotstein, so this is a very personal commentary. (It is also a convenient starting point, because if I am wrong about any of what follows, I can simply
deflect criticism by blaming Mel and Abe for teaching me incorrectly.) If
I view Mel as my intellectual parent, in tracing my intellectual lineage I
think Ive been lied to for years: my grandfather isnt Harold Innis, but
W.A. Mackintosh.
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When economic historian and theorist Harold Adams Innis died in 1952 at
the age of 58, Prime Minister Louis St. Laurent sent his wife Mary a telegram.
While Innis was not a public figure, he was widely respected for his academic work on the cod fishery, the fur trade, rail transport, and communications. And Innisian ideas about how Canada developed as a country were
influential in universities, and in wider discussions of public affairs.
Mel Watkins was a student of Innis, and remains engaged with his work
today. Interestingly, at MIT, Mel also studied under Paul A. Samuelson: another economic sciences giant, though of another theoretical persuasion
altogether.
With Samuelson, Mel co-authored the Fourth Edition of the Instructors
Guide to the legendary introductory textbook by Samuelson (entitled simply Economics) that cemented the link between mathematical representations of the economy, and contemporary economics.
Economics was first published in 1948, went through 19 editions, was
translated into 41 languages, and sold over 4 million copies. Through the
Samuelson text, what he called the Neo-Classical approach to economics became the dominant framework of economic analysis in the U.S, and
much of the world.
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Along with W.A. McIntonish, Irene Spry, Mable Timlin, and others, Harold Innis is considered the precursor of the Canadian political economy approach, practiced today by independently minded academics, and the inspiration for much of the policy research done by the Canadian Centre for
Policy Alternatives, trade unions, NGOs, social agencies, and left scholars
and activists with a policy bent. Along with Mel Watkins, the late Stephen
Hymer and Kari Levitt featured prominently in debates around foreign ownership (not investment) in Canada that animated the New Canadian Political Economy practiced by R.T. Naylor, Daniel Drache, James Laxer, and Wallace Clement. These debates widened and deepened in the scholarly journal
Studies in Political Economy, incubated at Carleton University by Leo Panitch, Rianne Mahon, and others, that attracted scholars across Canada, and
remains a lively outlet for research today.
Knowledge of Innis helps in seeing what is glaringly wrong with Canadian
economic policy, particularly in the dark decades since the 198182 recession. Despite the efforts deployed by the 1985 Macdonald Royal Commission
to claim Innis as a proponent for trade enhancement, the presumption that
the export trade is somehow the source of Canadian prosperity, and that export promotion (mercantilism) is what is needed to assure Canadas economic
future, is hardly what Innis, Watkins or Canadian political economy is about.
What separates Innis from everyday social science is not just that he brilliantly studied staples in a succession of scholarly volumes. Innis showed
that what he called staples production was what shaped Canadian society;
production techniques and associated technology were all-pervasive in the
pattern of human settlement of the country, and its social fabric. Canadians
became what Canada produced, as it were. Innis entitled his 1938 presidential address to the Canadian Political Science Association The Penetrative
Powers of the Price System.
The conclusions Innis reached are what make his work so important. At
the heart of his Canadian political economy is the proposition that the export of staple products creates uncertainty, and havoc when markets turn
against Canadian products. The work of Innis helped to understand how
when the world economy collapsed, producing the great depression, it took
the Canadian wheat-based economy with it.
The staples story is a cautionary tale Canadians ignore at their peril. As presented by Mel Watkins, the staples model of economic development remains
central to understanding questions of public policy in Canada, from resource
development to industrial policy, from transport to monetary, fiscal and social policy, and beyond to links with the continental and global economies.
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It features the influences of such matters as distorted infrastructure, limited backward or forward linkages, and, of course, the distribution of income from these export activities. There are parallel concerns and a parallel literature concerning plantation, estate or large-scale export-oriented
agriculture and forestry (such as bananas, pineapples, palm oil, timber,
etc.) in many other parts of the developing world. Not infrequently these
issues are accompanied by debates about the accompanying role of foreign direct investment, a matter on which Watkins also, of course, had a
great deal to say. Most recently it is foreign (Chinese, Arab, and other)land
grabbing in ostensibly independent sub-Saharan African countries that
has captured the popular spotlight. The concerns raised by this trend are
thoroughly Watkinsian.
Comparable Watkins-style analyses have long surrounded the issue of
(usually foreign-owned) mining and petroleum export activity in poor countries. What kind of infrastructure do such activities require, and do they
assist further development? Are there any significant domestic linkages?
Where does the income go? Some of these critical questions have at times
been drowned out by popular discussions of the resource curseovervalued currencies (Dutch disease), corruption, and overblown governmental spending of the (often lavish) revenues. After the recent boom in
international mineral and other commodity prices, with its resulting rapid
growth rates in poor commodity-dependent economies, there has been renewed attention to the longer-term development question of what, if anything, these successes leave behind after the boom has abated. In many
current policy discussions in poor countries, the staple theorys principles
are therefore very much in the limelight once again.
In many parts of the developing world, a version of staple theory has
also been deployed to analyse the relatively positive developmental implications of smallholder (peasant) agriculture geared at least partially for export: for example, with Tanzanian coffee or Ghanaian cocoa. I know this
with particular certainty because I have written extensively on these topics
myself...and I know where I got these ideas.
In later years these same analytical tools have been employed to acquire
a better understanding of the benefits and possible costs of labour-intensive
manufacturing for export, as in Bangladesh, and export processing zones
in a wide range of other poor countries. Significant labour income (largely
to female workers) accrues from these activities; but often, quite apart from
the lax fire, safety and other labour standards, precious little else is done to
further sustainable longer-term development.
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These staple theory approaches not only describe the likely developmental consequences, positive or negative, of alternative export choices
(where choices exist); but they also provide guidance as to policies that
might begin to overcome the deficiencies inherent in some of them. Staple
theory is not and never should have been seen simply as an approach to
economic history. By now it should be evident, too, that its applications go
far beyond the cases of Canadian cod fisheries, fur trade and wheat. The
insights of staple theory, both historical and policy-oriented, belong to the
world. That is why, during my more than thirty years teaching a graduate
course on International Aspects of Development at the University of Toronto, Mels article on the staple theory was always compulsory reading.
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In 1980 I first encountered the work of Mel Watkins, while I was completing my Masters thesis on the theory of regional export base, applied to the
Cuyo region of Argentina, at the Institute of Social Studies in the Netherlands. Indeed, Mels classic paper, A Staple Theory of Economic Growth,
has been very influential in the whole Latin American school of economic
development theory.
Watkins approach allowed us to leave aside the neoclassical theory
of export base, brought more complexity to the analysis of staples-driven
growth, and highlighted the range and contingency of possible outcomes
to the development process. He coined the term staples trap to refer to the
inability of a resource-based economy to mature into a diverse and industrialized one. Overspecialization in export-oriented staples implies dependence on foreign direct investment, while underpriveleging domestic manufacturing and economic diversification.
In regions with resource-intensive production, economic growth is strongly concentrated on staples, produced for export to more highly developed
regions. This supposedly paves the way for broader economic growth, and
implies a resource-intensive strategy for national and regional development
based on external markets. However, this optimistic story is incomplete.
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private residential neighborhoods highly controlled by security apparatus. At the opposite end of the spectrum is the withdrawal of producers and
workers from the rural to the urban areas, and the ever-present unemployed
workforceso-called bubbles of poverty.
To sum up, the globalization modernization process provokes increasing inequality and social polarization. Without changes in public policies
aimed at improving the distribution of social and economic resources, social conflict remains a permanent feature of the staples-dependent developing economy.
Research we are currently conducting at the National University in Argentina further develops the analysis of staples industries and resource-intensive development in peripheral capitalistic regions. We pay close attention
to the processes observed in recent decades following structural adjustment
and globalization. Our key findings include:
Staples industries generally failed to branch into mature manufacturing because they became caught in a staples trap, resulting mostly from the dominance of large foreign capital.
Technologically, staples industries are led by large international
firms, which own and develop the technology.
Developing countries and regions are attempting to complete the
transition to industrial capitalism, at a time when the strongest sections of world capitalism are themselves undergoing intensive concentration and centralization. This makes the transition all the more
challenging.
Profound instability results when the staple growth model changes
due to external causes.
Public policies, values and institutions reinforce economic concentration in the wake of the shifting conditions of internationalization.
Social and economic development as a result of the internationalization
of staples production, and the success of export activities and competitive
specialization in staples, foster an apparent modernization of the peripheral regions, in line with the shifting conditions of imperial relations. This
is a turning point, which helps to explain the dynamics of capital accumulation, the consolidation of the agents positions in the global supply chain,
the growth of some economic branches (but the shrinkage of others), and
the role of the state. This is a dialectical process in which both the product-
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ive forces and social relations represent the conflicted integration process
of the overall system.
While 50 years have passed since Mels seminal paper, his pioneering
analysis of the staple trap has kept its value in the development studies literature. It helps us understand the overall matrix of resource-intensive export production, and its impacts on production, accumulation, and
policyoutcomes that are still strongly visible in many developing countries, including Argentina.
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between 2005 and 2020 (Environment Canada 2013, p.21). Cost-benefit analysis of oil sands development shows that when environmental impacts are
included, oil sands development is a net cost to society (Joseph et al. 2013).
Given the magnitude of the expansion and its impacts, it is important that
Canadians have a comprehensive understanding of this development. Unfortunately, most of the analysis to date lacks a political economy perspective. Publications from the oil and gas sector focus on the alleged economic
benefits and the need to remove barriers to expansion (CAPP 2013; Honarvar et al. 2011). Governments are engaged in advertising campaigns extolling the virtues of oil and gas development, while much of the criticism of
the expansion focuses on specific themes such as greenhouse gas emissions.
While these critiques provide important insights, they do not provide a comprehensive understanding of the overall dynamics of staple development.
Thanks to the efforts of Watkins and the Canadian staple tradition he
helped to spark, we have a rich analytical framework for understanding the
current oil and gas boom. While a comprehensive analysis is beyond the parameters of this short overview, it is useful to provide a brief outline of how
staple theory would be applied.
The starting place is Watkins 1963 article. Watkins explains how external demand stimulates growth through the extraction of the staple, and
through the series of spread effects that he divides into the well-known categories of forward, backward, and final demand linkages. Later Watkins
and others (Kierans 1973; Gunton and Richards 1987) added what Hirschman (1981) terms the fiscal linkage, defined as the rent generated by the
staple. The production function defines the potential linkages of the staple.
Growth can occur over time; the economy may either diversify as it surpasses critical thresholds for new activities (the optimistic paradigm) or stagnate
if and when the staple sector declines due to changes in demand and/or exhaustion of the staple (the pessimistic dependency paradigm).
Watkins identifies key factors that influence the course of this development. Some such as external demand, quality of the staple, and the production function are exogenous variables largely beyond the control of the
staple producing region. Other factors such as the ownership of staple industries and the distribution of rent are endogenousin the sense that they
could potentially be managed by the staple region, albeit with great difficulty.
One endogenous factor cited by Watkins is foreign ownership, which can
inhibit growth by leaking income from the staple region to compensate foreign owners and by relying on foreign-located forward and backward linkages instead of developing them within the staple region. Another factor
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Refineries across the U.S. are hiring workers to build new units that can process oil sands output. Most of the giant trucks used to produce the oil sands
are manufactured in Illinois. Much of the software to run the complex production systems comes from Californias Silicon Valley. The oil sands industry is demanding leading-edge water treatment systems, environmental technology, hydrocarbon processing equipment, and countless other
goods and services, much of it imported from across the U.S. (Alberta 2013).
There are many reasons why these linkages are not developed in Canada.
Some may be based on economic fundamentals such as the availability of
low-cost surplus refining capacity in the U.S. (relative to higher-cost new
capacity in Canada). Some may be due to the institutional bias of foreign
firms to supply existing refineries that they own, instead of building competing facilities within the staple-producing region. As discussed above,
the rationale for upgrading bitumen into crude to reduce transport costs
(by up to 60%) and increase the marketability of the oil is persuasive. The
role of these and other factors requires detailed analysis. However, unlike
conventional analysis that simply accepts the outcomes as a given, staple
analysis asks what the actual and potential spread effects are, what factors
determine the spread effects, and what can be done to strengthen linkages
within the staple region.
Staple analysis also focuses on the fiscal linkage. How much rent is
generated by the staple, and where does the rent go? These are important questions that address both the contribution of the staple to developmentwhich is a function of the proportion of rent reinvested back into the
staple region relative to the proportion leakedas well as the equity questions of who gains and who loses from staple development. Maximizing the
contribution of the staple requires collecting rent and distributing it equitably to the owners of the staple; in the case of oil and gas, this is the public in the producing regions.
Again, available evidence suggests that a large proportion of rent is foregone by the public owner and retained by private sector oil and gas companies as a surplus return above normal returns to private capital. Plourde
(2010) estimates that the private sector retains between 38% and 65% of the
rent even under the new more aggressive Alberta royalty regime. A more recent study by the oil sector using a different methodology concludes that
the private sector retains 65% of the revenue from an oil price increase (Egglington et al. 2012), while a cost-benefit analysis of a major project estimates
rent retained by the private sector is in the range of 35% (Joseph et al. 2013).
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Given that 47% of the profits to the oil and gas sector accrue to foreign owned
companies (StatsCan 2012), most of the rent retained by the private sector
is ultimately leaked to foreign owners.
Another economic impact addressed by staple theory is the effect of
the staple expansion on other sectors. While conventional analysis considers only the positive linkages, staple theory looks at both the positive and
the negative. Expansion of the oil and gas sector can negatively impact
other sectors by using labour and capital that would otherwise be available to support growth elsewhere in the economy. Expansion of oil and gas
can also undermine the competiveness of other sectors by raising the exchange rate: the so-called Dutch disease. Estimating the negative impacts
of oil and gas expansion on other sectors is complex and subject to many
uncertainties. Nonetheless there is little doubt that a significant proportion
of the labour and capital employed in the oil and gas expansion would have
been employed elsewhere in the Canadian economy in the absence of oil
and gas expansion. Labour and capital have in economic terms an opportunity cost. There is also ample evidence that the expansion of the oil and
gas sector has raised the value of the Canadian dollar and that this has resulted in a reduction in the Canadian manufacturing sector (Bimenyimana
and Vallee, 2011; Campbell, 2011; Clarke et al. 2013; OECD 2012; Woynillowicz and Lemphers, 2012).
As Watkins illustrated in his work for the Dene (Watkins 1977), staple
theory is also useful in understanding the impact of staple development on
First Nations. If First Nations are integral to the extraction of the staple (such
as in the fur trade), they may receive some benefit from staple economy. If
they are obstacles to staple development, First Nations are more likely to
be excluded and potentially harmed to the degree that their traditional economic activities are negatively impacted by staple extraction.
The oil and gas sector is an increasingly complex environment for First
Nations. First Nations traditional subsistence activities are clearly jeopardized by environmental impacts of oil and gas development. Contamination of the environment by release of toxic chemicals and oil spills threaten
First Nations water and food supply, and current compensation and regulatory regimes are inadequate to protect First Nations interests (Gunton and
Broadbent 2012). Aboriginal rights and title affirmation by Canadian courts
does provide some protection for some First Nations. While First Nations
possessing rights and titles do not have clear veto power over resource development, the oil and gas sector is required to engage in meaningful consultation and seek accommodation of First Nations interests in resource de-
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velopment plans. This has led to the emergence of Impact Benefit Agreements
that provide direct benefits to some First Nations (Coates and Crowley 2013).
Another key component of staple analysis is the role of government. Governments in staple theory are not independent actors rationally choosing
policies based on the public interest as assumed in government legislation
governing oil and gas expansion such as the National Energy Board Act and
the Alberta Responsible Energy Development Act. Instead, as the dominant
sector driving economic activity, staple industries are able to successfully
pressure governments to implement policies that serve the interests of the
staple sector. Governments become promoters of staple expansion by setting weak regulatory regimes conducive to development, providing infrastructure, expediting regulatory review processes, providing marketing support, and managing opposition to staple expansion.
Again the evidence on the oil and gas sector lends support to the staple
theory analysis of government. The federal government, for example, recently amended Canadian regulatory legislation to expedite the approval process for pipelines and restrict the role of potential opponents in the
hearing processes (Westcoast Environmental Law and Ecojustice 2012).
Measures to address greenhouse gas reductions have been delayed or, in
the case of the Kyoto Accord, abandoned. Caps are set on liability for oil
spill damages to protect the oil and gas sector (Gunton and Broadbent
2012), while promotional programs extolling the virtues of the oil and gas
sector are being implemented and aggressive lobbying efforts to secure
access to foreign markets, such as the Keystone XL lobby in the U.S., are
being implemented. The government attacks opponents of expansion as
foreign radicals (Oliver 2012). And as discussed above, governments have
done a poor job in collecting rents for the public owners and have subsidized the expansion of the oil and gas sector by over $2.8 billion per year
(Sawyer and Stiebert 2010).
The staple theorys contribution to understanding the development
cycle is another key contribution. Preceding this years Nobel laureate Robert Shillers theory of irrational exuberance by 50 years, Watkins warns
in his 1963 article of the excessive optimism in the staple sector that causes booms to proceed beyond their proper limits, generating excess capacity
that leads to downturns and financial collapse.
Previous resource booms such as the post-1979 petroleum boom exhibit this excessive optimism dynamic (Gunton 2003; 2004). The current
boom displays similar features. As discussed above, the Western Canadian oil sector is undertaking an unprecedented expansion and the fed-
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eral and provincial governments are urging even more rapid expansion to
avoid missed opportunities in export markets. The result is that prices
for Canadian oil exports are already being depressed by the too rapid expansion of the sectorthe so-called bitumen bubbleas regional markets
are unable to absorb the increased output (Egglington et al. 2012; Moore
et al. 2011). A further doubling of production will do little to stabilize export prices. The large number of LNG projects being considered for BC exceeds forecast demand and is based on a large differential between North
American and Asian prices that may not last, leaving BC with uneconomic projects (Gunton and Broadbent 2013). The Canadian industry is a relatively high-cost producer and therefore is highly vulnerable to the inevitable downturns in markets. Staple theory provides a clear warning of the
dangers of such excessive optimism and the need for a more prudent approach of slower sustained growth.
Ownership is another key theme in staple theory. As Watkins illustrates, ownership affects staple development by impacting the location of
spread effects and impacting the development of domestic entrepreneurship. Again, very little analysis of the Canadian oil and gas sector addresses the role of foreign ownership. Almost one-half of oil and gas assets in
Canada are foreign-owned (Statistics Canada 2012), and incremental oil
production is being used to supply refineries outside Canada. Some oil is
being traded within existing companies according to intra-company transfer prices, which makes the collection of royalties challenging. This is particularly true for lower-value products such as bitumen for which there is
not a well-developed market price that can be used to determine royalty
payments (ARRP 2007). In fact many existing Alberta oil producers directly
benefit from the depression of Canadian export prices by realizing the benefit of higher refinery profits (due to lower crude supply costs) while paying
reduced royalty payments to Alberta. And what incentive do state-owned
companies such as Chinas CNOOC have in maximizing the export price of
Canadian crude or developing refining capacity in Canada? Even the federal government seems to be belatedly aware of the implication of foreign
state-owned enterprises, as represented by its stricter takeover policy implemented after approval of the takeovers of Nexen and Progress Energy in
2012 (Harper 2012).
What policies should be implemented to maximize the contribution of
staples to Canada? Again staple theory provides clear and persuasive guidance. According to staple theory, a successful strategy should include the
following key components:
49
Collect rent and ensure that it is reinvested back into the Canadian
economy.
Develop linkages where economically feasible to maximize the spread
effects. For example, there is a strong case for at least upgrading bitumen prior to export to reduce transportation costs and increase the
marketability and hence net return.
Maximize long run rent by slowing the rate of expansion to a sustainable pace to help moderate construction costs, prevent downward pressure on export prices, and reduce the negative impacts on
other sectors of the economy.
Mitigate environmental costs by reducing greenhouse gas and other
emissions, making Canadian oil and gas the cleanest fossil fuel in
the world.
Fully engage impacted First Nations in development planning and
preparation of impact benefit agreements that ensure an equitable
distribution of benefits.
Invest in training Canadian workers for oil and gas employment.
Phase out all government subsidies to the Canadian oil and gas sector.
Restrict foreign takeovers and strengthen domestic ownership of the
oil and gas sector.
As staple theory cogently illustrates, developing staples is a challenging endeavour filled with both opportunities and pitfalls. As Canada embarks on
its current expansion of oil and gas, Canadians need to assess the degree
to which this expansion serves Canadas interest. And thanks to Mel Watkins, we have a powerful analytical framework for undertaking such an assessment. We can only hope that more researchers follow the lead of Clarke
et al. (2013) and use staple theory to analyze the current boom in Canadian
resource developments. This would improve our understanding of the current staple boom, and hopefully encourage a more prudent approach to developing Canadas oil and gas sector.
References
Alberta. 2013. Albertas Oil Sands. Edmonton, Alberta. http://oilsands.alberta.ca/
U.S.EconomicImpactOilCalculator.html
50
Alberta Royalty Review Panel (ARRP), 2007. Our Fair Share: Report of the Alberta Royalty Review Panel.
Bimenyimana, C., Vallee, L., 2011. Curing the Dutch Disease in Canada. Policy Options 32: 7579.
Canadian Association of Petroleum Producers (CAPP). 2012. Crude Oil Forecast, Markets, and Pipelines. http://www.capp.ca/getdoc.aspx?DocId=209546&DT=NTV
Clarke, Tony, Diana Gibson, Brendan Haley, and Jim Stanford. 2013. The Bitumen Cliff. Lessons and
Challenges of Bitumen Mega-Developments for Canadas Economy in an Age of Climate Change.
Ottawa. Canadian Centre for Policy Alternatives.
Coates, K. and B. Crowley. 2013. New Beginnings: How Canadas Natural Resource Wealth Could
Re-shape Relations with Aboriginal People. Ottawa: MacDonald-Laurier Institute. http://www.
macdonaldlaurier.ca/files/pdf/2013.01.05-MLI-New_Beginnings_Coates_vWEB.pdf
Canada. Environment Canada. 2013. Canadas Emission Trends. Ottawa: Environment Canada.
Eglington, P., Mansell, R., Ruitenbeek, J., Schlenker, R., 2012. Public Interest Benefit Evaluation
of the Enbridge Northern Gateway Pipeline Project: Update and Reply Evidence. Prepared for
Enbridge Northern Gateway for the Enbridge Northern Gateway Joint Review Panel Hearings.
Enbridge. 2010. Enbridge Northern Gateway Project Section 52 Application, Volumes 2, Appendix
A. Retrieved from http://northerngateway.ca/publicreview/application
Ernst and Young. 2013. Potential Revenue to the BC Government from Potential Liquefied Natural Gas
Development in BC. Prepared for BC Ministry of Energy, Mines, and Natural Gas, February, 2013.
Grant, J., E Angen, and S. Dyer. 2013. Forecasting the Impacts of Oilsands Expansion. Edmonton,
Pembina Institute. http://www.pembina.org/pub/2455.
Gunton, Thomas I. and J. Richards eds.1987. Resource Rents and Public Policy in Western Canada.
Ottawa: Institute for Research on Public Policy.
Gunton, Thomas I. 2004. Energy Rent and Public Policy: An Analysis of the Canadian Coal Industry. Energy Policy. 32:2: 15163.
Gunton, Thomas I. 2003. Natural Resources and Regional Development: An Assessment of Dependency and Comparative Advantage Paradigms. Economic Geography. 79:1: 6794.
Gunton, Thomas and Sean Broadbent. 2012. A Review of Potential Impacts to Coastal First Nations from an Oil Tanker Spill Associated with the Northern Gateway Project. Burnaby, BC. Simon
Fraser University.
Gunton, Thomas and Sean Broadbent. 2013. LNG Development in BC: Issues and Policy Options.
Burnaby, BC: School of Resource and Environmental Management.
Harper, Stephen. 2012. Statement by the Prime Minister of Canada on Foreign Investment. http://
www.pm.gc.ca/eng/news/2012/12/07/statement-prime-minister-canada-foreign-investment
Hirschman, A. O. 1981. A Generalized Linkage Approach to Development. In Essays in Trespassing, Economics, Politics and Beyond, ed. A. O. Hirschman, 5998. Cambridge, U.K.:Cambridge
University Press.
Honarvar, A., Rozhon, J., Millington, D., Walden, T., Murillow, C.A., Walden, Z., 2011. Economic Impacts of New Oil Sands Projects in Alberta (20102035). Canadian Energy Research Institute, Calgary, AB.
Joseph, Chris, Thomas Gunton and D. Knowler. 2013. Using Cost-Benefit Analysis in Energy Project Evaluation: A Case Study of Alberta Oil Sands Expansion. Journal of Benefit-Cost Analysis. (forthcoming).
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Kierans, E. 1973. Report on Natural Resources Policy in Manitoba. Winnipeg: Government of Manitoba.
Lemphers, Nathan, and Dan Woynillowicz. 2012. In the Shadow of the Boom: How Oilsands Development is Reshaping Canadas Economy. Drayton Valley: Pembina Institute.
Moore, M., S. Flaim, D. Hackett, S. Grissom, D. Crisan, A. Honarvar. 2011. Catching the Brass Ring:
Oil Market Diversification Potential for Canada. University of Calgary School of Public Policy
Research Papers Vol. 4 No. 16. Calgary, Alberta: School of Public Policy.
Oliver, Joe. 2012. An open letter from the Honourable Joe Oliver, Minister of Natural Resources on
Canadas commitment to diversify our energy markets and the need to further streamline the
regulatory process in order to advance Canadas national economic interest, January 9, 2012.
http://www.nrcan.gc.ca/media-room/news-release/2012/1/3520
Organization for Economic Cooperation and Development. 2012. OECD Economic Surveys: Canada. Paris: Organization for Economic Cooperation and Development.
Plourde, A., 2010. On Properties of Royalty and Tax Regimes in Albertas Oil Sands. Energy
Policy 38: 46524662.
Sawyer, D. and S. Stiebert, 2010. Fossil FuelsAt What Cost? Government Support for Upstream
Oil Activities in Three Canadian Provinces: Alberta, Saskatchewan, and Newfoundland and Labrador. Winnipeg, Canada: International Institute for Sustainable Development. http://www.
iisd.org/gsi/sites/default/files/ffs_awc_3canprovinces.pdf
Shakeri, Mohammad, Richard S. Gray and Jeremy Leonard. 2012. Dutch Disease or Failure to Compete? A Diagnosis of Canadas Manufacturing Woes. Montreal: Institute for Research on Public Policy.
Statistics Canada. 2012. Corporations Returns Act 2010. Catalogue no. 61-220-X. http://www.
statcan.gc.ca/pub/61-220-x/61-220-x2010000-eng.pdf.
Watkins, M.H. 1963. A Staple Theory of Economic Growth. Canadian Journal of Economics and
Political Science. Vol. 29: 14158.
Watkins, M.H. 1977. The Dene Nation: From Development to Underdevelopment. In M.H. Watkins ed. Dene Nation: The Colony Within. Toronto: U of T Press. 8499.
Watkins, M.H. The Staple Theory Revisited. Journal of Canadian Studies. Vol. 12: 5: 8394.
Westcoast Environmental Law and Ecojustice. 2012. What Bill C-38 Means for the Environment. Vancouver, BC. http://wcel.org/sites/default/files/publications/Top%2010%20Environmental%20
Concerns%20of%20Budget%20Bill%20C-38.pdf
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Albertas Sands,
Staples and Traps
Gordon Laxer
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distorts Canadas economy and kills more jobs than it creates. But the approach is less good on how to get out of staple traps.
Brendan Haley takes us a giant step forward, arguing that the staple
trap around bitumen is also a carbon trap (From Staple Trap to Carbon
Trap, Studies in Political Economy 88, Autumn 2011). I then go a step further to argue that using the staples approach to understand and overcome
the dominance of Sands oil, can itself be an intellectual trap.
Mel Watkins 1963 article on the staple theory of economic growth was
a landmark; I regularly assigned it in grad seminars. While very illuminating, the article has limitations associated with Watkins early liberal phase,
as Mel readily recognized in later revisitations of the article. Written when
an applied version of Keynesianism was at its height as official doctrine in
the capitalist West, Watkins staple theory of economic growth is infused
with Keynesian assumptions.
Watkins original article reformulated the economic history insights of
Harold Innis into a theory of economic growth. It is a capitalist developmental model around a resource base, a variant of a more general growth
model built around exports as the leading sector. External demand for resources drives the staples variant.
Watkins took up A.O. Hirschmans concept of forward, backward and
final demand linkages to show how a staples economy could diversify beyond a simple, hewers-of-wood base. The key is that industries develop that
are closely linked to the exported resources. Forward linkages often focus
on primary manufacturing to upgrading the raw resources before exporting. In oil, these linkages could be built around bitumen upgraders, refineries and a thriving petrochemical industry.
Branching out further from oil and natural gas could lead to producing
everything made of plastics, solvents, fibres, pesticides and coatings. Alberta never got far down that path. In the 1980s and 1990s, Alberta had a
successful petrochemical industry based mainly around turning Albertas
temporarily cheaper natural gas into intermediate goods like ethylene, propylene, butylene and benzene.
But Alberta was in a very narrow, semi-industrial rut. Although it had
some forward and backward linkage industries, it remained highly dependent on continued external demand for oil and natural gas. Petrochemicals
supported more jobs than exporting raw materials only, but an economy
built mainly around the exported resource is not much better off than a pure
resource exporting one because they usually provide few jobs and tend to
rise and fall with the staple. Thats not true diversification.
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their families settle in, how could unions and the NDP then advocate phasing out the Sands? They couldnt and wouldnt.
We must not let the major constituencies capable of pushing a new vision for Alberta and Canada get sucked in to defending the carbon-emitting,
destructive status quo of Albertas Sands. Instead of being important forces
pushing Alberta and Canada toward a transition to a new green economy,
they would become part of the problem.
I used to support the staples diversification model. Upgrade the resources in Alberta. Dont export our jobs. Use way less energy, but get way more
value added from it. Now I think its a dead-end. It bets that the age of fossil fuels will unproblematically continue, and that we can blithely continue
to spew out carbon without limit.
As we saw, the staples theory views the final demand linkage as the best
way to fully escape a staple trap. Its based on consumer spending and economic growth.
The Keynesian post-war bargain went like this. If workers and their political allies agreed to forget their long-held dream of replacing capitalism
with a more just system and accept annual pay raises instead, they would
stay in alienated jobs with long work hours, but reap the rewards of middle-class, consumer lifestyles as compensation. The grand bargain led to
a mass society fixated on over-consumption. It will bury us in carbon and
climate change chaos.
A better path is deep conservation. A unit of fossil fuel energy saved and
not burned is much better than one extracted, used up and emitted. Many
more jobs can be created in saving a unit of carbon energythrough things
like building LRTs, a high-speed intercity train between Calgary and Edmonton, and retrofitting buildings and houses.
Brilliant theories are usually double-edged swords, illuminating the way
through seemingly disparate, murky phenomena and at the same time blinding us from other paradigms. So it is with the staples theory. Its hard to beat
its explanatory power regarding how Alberta Sands oil got to be Canadas
latest staple, impeding broader development. But with its Keynesian, consumptionist premises, the staples theory (in that original incarnation) can
also be an intellectual trap, that hinders our transition to a low carbon future.
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58
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In the same way, at the end of the nineteenth century, the animal spirits of the wheat economy led to a frenzy of unsustainable but lucrative railway building. Quickly, by the turn of the twentieth century, the three transcontinental lines were bailed out by the government and merged into two.
It seems those lessons have been forgotten, as we repeat the same errors
in overbuilding an expensive, unsustainable energy export infrastructure.
Innis rightly emphasized that Canada needed an altered trajectory to mobilize its resources in order to build strong industries, deepen its domestic
market, and create new and better employment opportunities. Without a national strategy, investment follows the continental grooves of geography. The
process is driven by a hot energy sector sucking foreign direct investment
into mining, oil and gas, and metals, lifting stock markets. Higher resource
prices affect the exchange rate, with a disequilibrating impact on consumer
and energy prices. An overvalued dollar knocks small- and medium-sized
firms out of the competitive race, as they are forced to compete at a currency disadvantage too large to be offset by other factors.
Canadians needs to recognize that the current staples trap is reproducing
once again the problems of structural imbalance, debt hangover, and the
hollowing out of Canadian industry. Ottawas approach has been to rebuff
any notion of a viable energy policy, and instead let so-called market forces
pick the winners. Canadas past policy successes required government to
row and steer the economybut Stephen Harper hardly sees this as his role.
The path to any substantive change in Canada requires us to examine the
past and learn the historical dynamics. If the Canadian state can no longer row
and steer the economy, it will be impossible to have national environmental policies and national resource strategies with realistic goals and realistic
chances of success. The current resource boom is swamping any viable notion
of an effective and comprehensive national energy and environmental policy.
All of these transformations are political with roots that stem from political power. Todays resource curse is more complex, multi-stranded and
transnational than in Innis day. It is rooted in more than commercial dependency on the U.S. market. It has led to a variety of rigidities with crippling consequences for an economy burdened by debt and a shrinking industrial core. It has intensified the conflict between regional needs and local
institutionsand the parallel conflict between local markets supporting indigenous developments and a compliant laissez-faire state. Regional specialization in resource exports has limited the role of central government,
fragmenting policy space and weakening national regulatory capacity (including, crucially, the capacity to set environmental standards).
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even having multiple regions exporting Canadas wealth from the ground
can only lead to more imbalances and twisting of markets. Winner-take-all
regional economies do not want Ottawa to co-ordinate national goals and
objectives; rather they hide behind a narrow regionalism that Innis was highly critical of. This leaves giant corporations like Enbridge and Vale in charge
of Canadas resource future. Still, the public supports reducing greenhouse
gas emissions and moving in a greener direction.
Innis was an institutionalist, not a determinist; he assigned primary importance to the policy environment and its regulatory institutions. If a government leads from the rear, the outcomes are suboptimal. An out-in-front government can set strategic goals and the appropriate means to achieve them.
We need to look at how other jurisdictions unlocked the trap of erroneous
policies from the past (Drohan 2012). Deviations from orthodoxy or, more precisely, policy innovations ultimately stem from changes in power relations.
In Canada, we must build a very different policy environment to escape
the modern staples trap and address the imbalances of fixed overhead costs,
mountains of debt, and over-investment in unsustainable mega-projects.
Other countries have successfully climbed out of the staples trap, altering
their economic trajectories. A survey of this experience suggests that seven
conditions need to be met.
First, there must be a champion inside the political class to make it
happen: such as a latter-day Walter Gordon or Eric Kierans. Second, there
must be a strategic purpose and moral compass for environmental and redistributive goals. Third, the country must possess a valuable commodity
that gives the state the leverage to negotiate new resource revenue sharing
with MNCs (revenues which in turn are recycled to support broader development goals). Fourth, the country needs a modern infrastructure. Fifth, public opinion must be on side to demand fundamental policy changes. Sixth,
there need to be credible new ideas to transform the resource curse into
a blessing. This requires a strategy to use resources as a driver of domestic growth and diversification, competitive industries, and strong job-creation. The final ingredient, of course, is luck. Here, timing is key: the optimal moment to introduce a national energy policy is during the upswing of
a commodity boom, when the state has optimal leverage with banks and
resource players.
No country ever has all these ducks lined up. But fresh ideas, strong
leadership, and optimal timing are the key ingredients that could allow
Canada to attain a more promising future than blindly riding the staples
roller-coaster yet again.
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References
Acemoglu, Daron and James A. Robinson (2012). Why Nations Fail The Origins of Power, Prosperity and Poverty. New York: Crown Business
Adams, Michael (2003). Fire and Ice: The United States, Canada and the Myth of Inevitability Toronto: Penguin, 2003.
Banting, Keith, George Hoberg and Richard Simeon eds. (1997). Degrees of Freedom: Canada and
the United States in a Changing World Montreal: McGill-Queens, 1997.
Barker, Alex and James Politi, (2013) Brussels proposes 30bn Tobin tax, Financial Times,
February 14.
Canada Watch, Special Issue, Canada-U.S. Relations Daniel Drache ed.8: 45, NovemberDecember 2002, available at www.robarts.yorku.ca
Drache, Daniel (2004). Borders Matter: Homeland Security and the Search for North America,
Halifax: Fernwood.
Grant, Hugh and Wolfe, David eds. (2007) Staples and BeyondSelected Writings by Mel Watkins, Montreal: McGill-Queens U.P.
Helliwell, John F. (1998). How Much Do Borders Matter? Washington, D.C.: Brookings Institution.
Hirschman, Albert. (1958). The Strategy of Economic Development. New Haven, Conn.: Yale University Press.
Innis, Harold (1995). Staples, Markets and Cultural Change: Selected Essays, ed. by Daniel Drache
Montreal: McGill-Queens, UP.
Jackson, Andrew. (2002-2003) Poverty and Income Inequality in the 1990s, Economy 13, no. 3
(Winter), CLC, Ottawa.
McCallum, John. (June 1995). National Borders Matter: Canada-U.S. Regional Trade Patterns,
American Economic Review 85: p. 61523.
Myrdal, Gunnar. (1957) Economic Theory and Underdeveloped Regions, London: Gerald Duckworth.
Porter, Michael (1992) Canada at the Crossroads, Ottawa: BCNI and Government of Canada, Industry and Commerce.
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Mel Watkins pioneering work on staples theory continues to help Canadians understand both the opportunities and the risks of our staples-dependant economic trajectory. After Mels 1963 article, and his subsequent
policy advocacy (on Walter Gordons task force and other initiatives), it
seemed for a while that Canada was gradually escaping its staples trap. We
experienced decades of uneven but important progress in diversifying our
sectoral mix, reducing reliance on incoming foreign direct investment, and
building significant and globally successful clusters of tradable value-added industries (including auto, aerospace, telecommunications equipment,
and some tradable services). By the turn of the century, raw and barely processed resources accounted for well under half of Canadas total merchandise exportsthe lowest in our history (Stanford, 2008).
Early in the new century, however, the logic of staples dependence reasserted itself. Inflated global commodity prices (especially for oil, some minerals, and agriculture) sparked major inflows of capital into expanded staples production in Canada. Exports of raw staples grew substantially (driven
mostly by higher prices, and less so by higher quantities); profits in staples
industries were enormous but volatile. At the same time, many value-added industries went into a long declineand that slide was not independent from the renewed staples boom. In particular, the petro-fueled 65-percent appreciation of the Canadian currency (taking it from well below, to
65
well above, its fair value within 5 years),1 was a major cause of the decline
that is still being experienced in all other trade-sensitive industries (including manufacturing, tourism, and tradable services).
By 2012, raw and barely-processed resources once again accounted for
two-thirds of total exports. Yet, perversely, Canadas total exports declined
by one-third as a share of GDP from 2000 through 2012 (with the decline in
non-energy exports far outweighing the increase in energy exports). Incoming FDI doubled as a share of GDP compared to the mid-1980sreaching a
higher level (34 percent) by 2009 than when Watkins published his original 1963 article. The current account balance shifted from surplus to large,
chronic deficit (adding an amount equal to over 3 percent of GDP each year
to Canadas foreign debt). Even with high commodity prices, it seems, Canada cannot extract and export staples fast enough to pay for its imports of
more sophisticated (and more expensive) goods and services. Productivity
suffered from both the unplanned, boom-time nature of new investments
(Stanford, 2011), and the inevitable decline in productivity that is normally
experienced in resource extraction (as the most easily-tapped deposits of
non-renewable minerals are exhausted). The helter-skelter boom in staples
industries (experienced most dramatically in bitumen) created economic
opportunities in some regions, but many problems, too: including regional crises in housing, infrastructure, and labour supply; immense strains
in our system of fiscal federalism; and a spate of environmental problems,
both localized and global.
The most important of these, of course, has been the growth of greenhouse gas emissions from bitumen production. The industry trumpets important reductions in the emissions intensity of each barrel of produced
bitumen, but those savings are overwhelmed by the rapid expansion of
total bitumen outputand the biggest growth in output is yet to come, according to forecasts which expect a tripling of bitumen production (to 4.5
million barrels per day) in the next two decades. GHG emissions from new
bitumen production have blown the lid off Canadas Copenhagen targets
(which were grudgingly accepted by the Harper government, even as it became the first government in the world to withdraw from the Kyoto Protocol). They have also squandered the GHG reductions achieved elsewhere in
Canadas economy (such as through the expensive phase-out of coal-fired
electricity generation in Ontario).
In short, the key features of the staples trap first identified by Watkins
are all visible again in Canada today: A cozy compact between government
and the staples-exporting industry (described in detail in Clarke et al.,
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2013). Enormous, publicly-subsidized investments in export-oriented infrastructure. Pressure to extract and export the staple in ever-larger volumes
to amortize development and infrastructure costs faster. A cumulative reinforcement of the dominance of the staple as seemingly the only path to
economic progresseven as the risks of staples-reliance become increasingly obvious. Regional inequalities and tensions between staples-producing regions and the rest of the country. And weak spin-off effects (forward
and backward linkages, to use Watkins 1963 terminology) from the staples
industries for investment, innovation, and capacity-building in other parts
of the economy.
One dimension of the modern staples problem that is clearly more important today than in 1963, is the environmental constraints and consequences
of staples production. Resource industries have always confronted the natural environment more directly than other sectors of the economy, and a
legacy of environmental degradation has always been a major downside of
unthinking, unmanaged staples extraction. But the growing challenge of
climate change means this dimension must be considered more centrally
in our analysis of staplesas Brendan Haley, for example, has done in this
collection (and in his important 2011 article).
Watkins 1963 article argued that pro-active policy interventions were
required to break the self-reinforcing logic of the staples trap, and set the
economy on course toward a more diversified and self-directed form of development. This strategy did not recommend trying to suppress staple industries. It focused, rather, on carefully regulating the pace and character
of staples development. Key planks in this policy strategy included:
Recognizing and enhancing the forward and backward linkages of
resource production, through which staples activity could translate
into a more fulsome and well-rounded form of development (both
quantitatively and qualitatively).
Regulating foreign investment, foreign ownership, and foreign trade
in the staple industry, for all the well-known reasons.
Acting to foster investment and capacity-building in other value-added sectors of the economy (including manufacturing and services),
so as to reduce the entire economys vulnerability to future staple
cycles and attain a more self-sustaining, well-rounded prosperity.
Watkins also explored the political-economy of fighting for those kinds of
reforms, recognizing in particular the confluence of power between staples
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earlier decades (led by figures such as Peter Lougheed) tried to foster Canadian value-added activity in petroleum refining and petrochemicals; these
ideas seem downright radical by todays standards. In contrast, federal and
provincial policy-makers today mostly ignore the importance of Canadian
upgrading, refining, and petrochemical manufacturing, claiming these decisions are best left to the cost-minimizing decisions of private companies
(even if those companies are foreign-owned, and have a private vested interest in processing Canadian crude in their own foreign facilities).2 The result is an unsustainable flood of unprocessed exports (including raw bitumen) that has depressed prices in regional export markets. The flip side of
the coin is growing Canadian imports of refined petroleum products: incredibly, Canadian refined product imports now almost equal our own exports
of refined products (which have stagnated in the wake of refinery closures,
a stark contrast to booming upstream production).
In short, as a major petroleum producer, Canada is squandering the opportunity to generate additional jobs, incomes, and exports from whatever
amount of petroleum production we determine is appropriate (in light of
environmental constraints). We need a pro-active strategy not just to closely manage resource extraction (for many reasons: including greenhouse
gases, efficiency, macroeconomic stability, and economic inclusion), but
also to maximize forward and backward linkages so that resource production can support (rather than undermine) broader economic development
goals. Less extraction and more value-added is the motto that summarizes this effort. Applied to the petroleum industry, this approach would involve efforts to support Canadian machinery and service industries (and
hence increase upstream inputs to resource projects), limit exports of raw
petroleum, and mandate more made-in-Canada upgrading, refining, and
petrochemical activity. This vision is consistent with the approaches that
Canadian trade unionists and nationalists have taken to other resource industries in the past: such as demanding restrictions on exports of raw logs,
in favour of Canadian wood manufacturing, or supporting requirements
that fish caught in Canadian waters must be landed and processed in Canada, or requiring domestic milling and refining of minerals (like nickel and
copper). The theme of maximizing Canadian value-added from our own resources, both to enhance the economic spin-offs from those resources, and
to support the development of a broader range of economic capacities, is a
progressive idea in Canada with a long pedigreeand continuing relevance.
Some environmental advocates worry we should not increase our economic dependence on natural resource industries at any stage of the value-
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References
Campbell, Bruce (2013). The Petro-Path Not Taken: Comparing Norway with Canada and Albertas
Management of Petroleum Wealth (Ottawa: Canadian Centre for Policy Alternatives), 80 pp.
Clarke, Tony, Diana Gibson, Brendan Haley, and Jim Stanford (2013). Bitumen Cliff: Lessons and
Challenges of Bitumen Mega-Developments for Canadas Economy in an Age of Climate Change
(Ottawa: Canadian Centre for Policy Alternatives), 102 pp.
Haley, Brendan (2011). From Staples Trap to Carbon Trap: Canadas Peculiar Form of Carbon
Lock-In, Studies in Political Economy 88, pp. 97132.
Honarvar, Afshin, et al. (2011). Economic Impacts of New Oil Sands Projects in Alberta (201035).
Calgary: Canadian Energy Research Institute.
Organization for Economic Cooperation and Development (2013). Purchasing Power Parities
for GDP, National Currency Units per U.S. Dollars, OECD Key Tables, www.oecd-ilibrary.org.
Stanford, Jim (2008). Staples, Deindustrialization, and Foreign Investment: Canadas Economic Journey Back to the Future, Studies in Political Economy 82, pp. 734.
Stanford, Jim (2011). Canadas Productivity and Innovation Failures: Questioning the Conventional View, in The Canada We Want in 2020: Towards a Strategic Policy Roadmap for the Federal Government (Ottawa: Canada 2020).
Notes
1According to the Organization for Economic Cooperation and Development, the PPP value of
the Canadian dollar (reflecting the exchange rate that perfectly offsets nominal price differentials) is 81 cents (U.S.) (OECD, 2013).
2One exception to that trend has been the Alberta governments fiscal support for the new Sturgeon upgrader and refinery, scheduled to be completed in 2017.
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Part 4: Modern
Applications
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In my search for insights into the opportunities and barriers to transitioning Canada towards a low-carbon economy, Mel Watkins (1963) article,
A Staple Theory of Economic Growth, was one of the first places I looked.
The article is indispensable because Watkins undertook the ambitious
endeavour of translating the wide-ranging and multi-disciplinary, but largely descriptive, work of Harold Innis and other Canadian and non-Canadian
economic historians into a theoretical synthesis. The article contains the first
written use of the term staples trap to describe the pitfall that resourcebased economies can encounter.
Below, I intend to highlight the richness of Watkins theory and the multiple factors that can produce the staples trap. I will then outline how I have
applied this pattern in Canadian economic history to discuss Canadas current climate change problem as a carbon trap. Finally, I will discuss if the
policy agenda required to escape from the staples trap, as defined 50 years
go by Watkins, conflicts with what is needed to escape the carbon trap.
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based on linkages (forward, backward, final demand) from the base staple
to other sectors of the economy. This formulation invited the use of inputoutput models; weak linkages are indicative of the staples trap of over-dependence on resource exports.
However, Watkins consideration of spread effects from a resource
staple base also included supply-side factors, highlighting the influence
of the staple on the nature of entrepreneurship (both private and governmental) and technological absorption and innovation. The consideration of
these factors is true to the Innisian tradition, moving beyond physical and
financial linkages, towards the influence of staples on institutions, values,
and politics. I dont remember talking about this in my undergraduate class.
Watkins further opens up his analysis to consider shifts in the international environment, to which staple-based economies are particularly vulnerable. He notes that sustained development requires economic institutions
that support the ability to shift production in the face of economic change.
This introduces the value of resilience and adaptability and the need to consider factors such as knowledge assets and access to education, the nature
of political power, and the ability to use and produce new technologies.
Throughout much of the article, Watkins is answering to the same criticism that is heard today: that the approach is an historic description and
no longer relevant to the modern Canadian economy. Yet, to an economic
historian, history matters. While the structure of the economy changes and
evolves, it does so along a particular trajectory, which has a historic starting point. Even if the staple is long gone, it can still leave its stamp that
influences subsequent developments.
Watkins is very careful not to claim that staples are the unifying theme
in explaining the growth of the Canadian economy at all times, but he also
makes the salient point that the most persistent staple biases relate to economic institutions and political values. Furthermore, an inhibiting export
mentality and the undue political influence of staple exporters are key determinants of the staples trap.
This insight echoes throughout Canadian economic policy debates. Following the article, Watkins himself (1977), Kari Levitt (1970), The New Canadian Political Economy School (Drache and Clement 1985), and industrial
policy advocates (Britton and Gilmour 1978) all discussed how Canadas lack
of innovation, its truncated form of industrialization, and its dependence
on foreign technology, could be traced back to its staple history. A country
weak in innovation capabilities might easily rebound back towards resources as the safe space, as discussed by Stanford (2008).
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All of this is to warn that in the Canadian context, leaving the free market to its own devices can easily recreate the staples trap of resource and
technological dependence. Correspondingly, if we wish to enhance the transformative power of the Canadian economy and reduce its vulnerability to
international shocks, Canadian policy makers need to develop political programs and economic institutions capable of opening up different trajectories.
Changing the trajectory would require interventions across the series
of factors that influence the structural evolution of the economy. Since this
is a problem that involves economic and political structures, interventions
cannot be limited to getting the prices right, but must also include policies to promote factors such as entrepreneurial activities, knowledge production and exchange, and the coordination of national and regional efforts.
A fundamental conundrum since Watkins wrote his article has been the
challenge of developing an industrial or innovation policy aimed at increasing Canadas capacity for transformation, in the context of historically bestowed economic institutions and political interests promoting an inhibiting export mentality.
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nerability by diversifying towards low-carbon technologies, political and industrial leaders react by exacerbating the rigidities even further by calling
for the build-out of new infrastructure (such as pipelines) and weakening
environmental regulation and initiatives.
The carbon trap certainly relates to the chance geographic circumstance
of Canada sitting on top of a highly carbon-intensive resourceat the very
time when the world needs to reduce carbon emissions. Pulling from Watkins insights, we can also add that the institutional and political stamps
left by previous staple periods contribute to the durability of the trap.
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entrepreneurial activities, the creation of new economic institutions, and political values aimed at building economic diversity in order to open up new
pathways towards desirable futures. In the context of the climate problem,
these pathways must be based on deep greenhouse gas emission reductions.
Of course the latter policy agenda does not necessarily preclude activities
such as upgrading and use of domestic machinery along the way towards a
low-carbon economy. But a change in political understandings, economic
institutions, and an economic strategy would have to be first and foremost.
Then a sectoral strategy could be developed within the bitumen sands that
would encourage linkages if they could help mould Canadas economic
structure towards low-carbon pathways. The fundamental policy problem
is again the need for a Canadian innovation policy, this time a green one.
Like any concept, the staples trap has been interpreted in many ways.
In an article as ambitious and wide-ranging as A Staples Theory of Economic Growth, it is possible to pull out different facets. In my discussion, I
have tried to argue that the institutional, evolutionary, and political insights
within the article are critical for us to escape todays carbon trap and that
an overly static and narrow understanding of linkages can be dangerous.
Fifty years on, Watkins article still provides insight and clues into what
we should do today. It deserves to be read and re-read.
Bibliography
Britton, John N. H. and James M. Gilmour. 1978. The Weakest Link: A Technological Perspective on
Canadian Industrial Underdevelopment. Ottawa: Science Council of Canada.
Drache, Daniel and Wallace Clement, eds. 1985. The New Practical Guide to Canadian Political
Economy. Toronto: James Lorimer and Company.
Haley, Brendan. 2011. From Staples Trap to Carbon Trap: Canadas Peculiar Form of Carbon Lockin. Studies in Political Economy 88: 97132.
Levitt, Kari. 1970. Silent Surrender; the Multinational Corporation in Canada. Toronto: Macmillan of Canada.
Stanford, Jim. 2008. Staples, Deindustrialization, and Foreign Investment: Canadas Economic
Journey Back to the Future. Studies in Political Economy (82).
Watkins, Mel. 1977. The Staple Theory Revisited. Journal of Canadian Studies 12 (5): 8394.
Watkins, Mel. 1963. A Staple Theory of Economic Growth. Canadian Journal of Economics and
Political Science 29: 141158.
79
In British Columbia, the top economic priority of the provincial government is the development of a new liquified natural gas (LNG) industry.
The recently re-elected Liberals, led by Premier Christy Clark, made LNG
the centrepiece of their election platform, claiming that the resulting boom
would be worth $1 trillion, create 75,000 direct jobs, and leave the province
debt-free and without a sales tax (free puppies may be involved as well). Its
very possible this vision of a new staple industry will vaporize (pun intended), due to the tough economics of LNG and the cumulative environmental impacts it would entail. But nevertheless it already seems to have been
a political winner: relentless commitment to resource development was at
least part of the reason Clarks Liberals defied a 20 point deficit in the polls
before the election campaign, to achieve victory over a shell-shocked NDP.
Post-election, the BC Liberals have now created an entire ministry dedicated to getting LNG deals signed. There are as many as 12 proposed projects
for LNG terminals, most of which would be located around the north coast
city of Kitimatalthough the provincial government expectation is that only
3 to 5 terminals would eventually be built. That said, the grand total of projects underway so far is zero, and its possible no LNG facility will ever get
off the ground. Each is a multi-billion investment that requires a firm supply
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ous lands, and contaminating the environment). Chevron did not make
the top ten, but it is fair to say its got game when it comes to human rights
abuses. For those concerned that Canada is becoming a petro-state, this is
deeply troubling.
The path to LNG riches has some other BC-specific obstacles. Clarks predecessor, Gordon Campbell, brought in a range of climate action policies in
200708, including the provinces well-regarded carbon tax, and legislated
greenhouse gas reduction targets. While some insider champions of LNG do
not care about climate change, the province is wrestling with its own cognitive dissonance: how to stick to past commitments to reduce greenhouse
gases, while substantially growing production of a key fossil fuel. BCs
media savvy Premier now talks about the cleanest natural gas or cleanest LNG in the world.
The problem is the math: in order to move ahead with LNG projects while
still meeting the governments own GHG targets, every other sector of the
BC economy would need to make radical and unprecedented reductions in
its emissions. One option under examination is purchasing carbon offsets,
but this could be expensive and BCs offset regime has been much criticized.
Another issue is accounting conventions that do not count embodied GHG
emissions in exports (instead, they count in the importing countrys GHG
inventory). On a lifecycle basis, total GHG emissions into the air that originated below ground in BC would double or even triple, depending on the
number of LNG plants. It would be the emissions equivalent of putting between 24 to 64 million cars on the roads of the world.
Related to, and compounding this, is that liquifying gas for export is itself massively energy intensive. BCs 2010 Energy Plan committed to 93%
of electricity production in the province coming from clean or renewable
sources. Were it to be met by new renewable supply, BC Hydro modelled
an increase in demand from three LNG equivalent to one-third of its total
current production. Renewables are more expensive, and existing commitments to private power producers for new supply are already creating pressure for price hikes. To get around this, the BC government conveniently
declared that burning natural gas for LNG production would be considered
to be clean energy.
Upstream, the environmental problems only get worse. Huge volumes of
water, plus sand and chemicals, are needed to engage in fracking activities,
typically rendering the water unfit for any other purpose, effectively taking
it out of the water cycle. Local landowners and First Nations are rightly concerned about leakages of gas and chemicals into their water suppliesthe
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fracking industry has become synonymous with images of ranchers lighting their tap water on firenot to mention small earthquakes. In terms of
GHG emissions, field studies have shown high leakage rates of methane (the
main component of natural gas). A much more potent greenhouse gas than
carbon dioxide, methane leakages are disproving any claims that natural
gas is the cleanest burning of the fossil fuels. Field research in BC is lacking, but if U.S. results hold then BC gas would be worse in terms of its GHG
emission profile than dirty old coal.
These problems might seem to strike up a classic jobs versus environment problem for LNG, except for one thing: there are very few jobs. The
lofty numbers being floated by government are simply not credible. At its
inception, BCs Natural Gas Strategy (based at the time on 3 LNG plants)
estimated about 800 permanent jobs and up to 9000 jobs during construction. This is a very capital intensive industry, and even with five LNG plants
on stream, modelling suggested about 2,500 permanent jobs (this assumed
workers would otherwise be unemployed, as these models often do). And it
is reasonable to assume that additional upstream jobs from fracking would
lead to another 2,000 to 3,000 jobs. But these fall way short of public claims
being made by the government, which originally claimed an unsupported
40,000 new jobs in an infographic. Then that number was inflated to 75,000
permanent jobs over 5 LNG plants on the basis of a consultants report (which
is loaded with caveats that distance itself from its own numbers).
On the other hand, Shell has commented that it will take an Ikea approach to LNG plant construction, with plans to ship large pre-built modules to Kitimat to reduce the number of construction workers needed. Nor
is it clear that BC workers will get the work available: pipeline building
crews move around the continent to where the work is, and the growing reliance in BC and Alberta on temporary foreign workers is cause for concern.
Far from being a description solely of Canadian economic history, Mel
Watkins staples theory of economic growth clearly applies to this 21st century BC story. Watkins critique of multinational corporations and foreign
ownership, and more recently his concerns about climate change, are also
relevant. The resource development mindset is particularly strong in Western Canada, deeply institutionalized in government and business circles.
They understand well the concept of staplesbut they are not concerned
at all about the pitfall of a staples trap.
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During the ginseng boom years, price fluctuations and Chinese demand
for the plant had a major social and economic impact on New France. When
prices were high, the fields were deserted as people took to the maple groves
in search of the roots that they hoped to exchange for hard cash. When prices
crashed, the merchants ships lay in harbour as the stockpiles of roots rotted in warehouses in Ville-Marie or Quebec City and inhabitants went back
to their wheat harvests. In the meantime, the ginseng grew back anew in
the shade of the maples. Considering that it takes three years for a seedling to flower and produce seeds, it is easy to see how quickly the ginseng
population was decimated by over-harvesting. Even today, it is a threatened
species in Quebec. And this is how, in less than a century, one of our first
experiments with an extractive and primarized economy came to an end.
The ginseng episode demonstrates the risks facing any country that allows its economy to become primarized by focusing on the extraction and
export of natural resources. Such an economy holds the promise of resource
revenues that are the stuff of dreams for workers and capitalists alike, with
easy money to be made by selling, very far away, a product that has undergone little or no processing. But this economy also entails the overexploitation of resources, increasing distance from extraction sites due to depletion
of the resource, dependence on foreign markets, revenue volatility, and the
diversion of labour and investment from domestic sectors to the export sector. The history of Quebec (like Canada), from colonial times to the present,
is marked by several episodes of extractive economies: beaver pelts in the
Pays-den-Haut, cod fishing in the Gulf of St. Lawrence, soft-wood lumber
in Lower Canada, and, closer to home, iron ore at one cent per tonne in the
Cte-Nord region, boreal forest spruce transformed into newsprint for the
New York Times, gold and nickel in Abitibi, and now the latest potential
additionsoil and shale gas from the Gulf of the St. Lawrence and the St.
Lawrence Valley. The highs and lows of staples extraction have been documented by several historians. The great Harold Innis is credited with the
most comprehensive study of the political economics of the primarization
of economies and societies. Then Mel Watkins developed his work, drawing
out the policy lessons and alternatives.
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moved closer to the extraction sites, often at a great distance from more
structured, populated centres (and often from their own familes). The way
of life of these deterritorialized communities also causes them to become
dependent on extraction.
In fact, according to Innis, society as a whole eventually becomes dependent on the primarized economy and extraction revenues as a result of
three main factors. First, a class alliance emerges around extractionbetween extraction and transportation industrialists, and between financiers
and the political elite, all of whom derive their prestige, their wealth and
their power from this economy. This alliance also rallies the extraction workers, despite their mistrust of their employers. This alliance is not just based
on economic interests; it is based, more broadly, on its entire vision of the
world, nature, history and its place in history that become imbued with an
extractivist ideology and culture. After all, a large part of Quebecs folklore
is rooted in this staples mindset, which is currently undergoing somewhat
of a revival, as reflected in a certain neotraditional popular culture.
In this context, the government eventually grows so dependent on extraction revenues, no matter how meagre, that it winds up feeding off extraction activities and mobilizing the resulting royalties and taxes to finance
public spending. Thus, investments in extraction infrastructure, the massive transfer of development rights to private interests and the establishment of worker communities at isolated extraction sites are all held up as
part of a vast mobilizing project by the powers that be, who suddenly take
on the air of great builders and visionaries.
Finally, the extraction dynamic becomes self-perpetuating. While the primarized economy initially develops around products that are relatively easy
and cheap to access, the rapid depletion of these sources creates a spiral of
exploitation that becomes more and more expensivefarther away, deeper underground, more impure, more scarce. But because the capital is already invested in extractive processes, because policies are adapted to the
exploitation of these resources, and because the workers are trained in this
mode of extraction, it is easier to continue down this road, to go farther and
deeper, rather than changing direction.
Dependence intensifies as the scarcity of the resource drives up its price,
providing an additional incentive to extract higher-cost resources. This is
the ecological paradox of extractivisim: the scarcer a resource becomes, the
more its cost rises, the more profitable it is to exploit the least productive deposits and sources, right up to the last ounce, the last beaver, the last cod
or the last spruce. The reason is that, ultimately, a primarized economy is
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essentially an economy determined by external forces; its development depends on export markets, it creates value not by processing commodities,
but by ensuring their widest possible circulation. The global industry is dependent on economic cycles over which it has no control. But when prices
and demand increase, as they did in the ginseng era, the most costly extraction projectsthose whose success is the least certainsuddenly appear feasible...
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or fisheries industries, have the same impact today as they had prior to the
20th century, despite the fact that entire regions still depend on their existence. Re-primarization is not a state of affairs, but rather an economic project, idea and culture that has the support of a significant segment of our
economic and political elite. The project entails directing government resources to the development of extraction activities in a context of sluggish
growth in other sectors of the economy. Goods and services economies are
stagnating in both North America and Europe, and this stagnation is not
solely the result of the latest crisis. However, the economic crisis, and particularly the austerity policies that have emerged in response to it, have
trapped these economies in a vicious cycle of weak growth.
In the meantime, China, along with a handful of other so-called emerging economies, have largely benefitted from the opening up of trade and
globalization, which have spurred rapid industrial growth. Their hunger
for raw materials and energy seems insatiable, whether it be oil, coal, iron,
zinc, rare earth metals, arable lands, paper, lumber, titanium, gold, silver,
uranium. This is looked upon as a new panacea by those whose hinterland
and underground are rich in these resources. Foreign investors are knocking on our door, fly-in/fly-out wages are very high, and resource royalties
are seen as a way to balance public accounts; the attraction of re-primarization is simply too strong.
In short, after two decades of crisis, industrial restructuring, job loss,
failure of economic recovery policies, industrial experiments and innovation clusters of every kind (including biotech, aluminium, fashion, pharmaceuticals, video games, hedge funds and other new economy industries),
it seems we have finally found a development project that is simple and unifying: extract everything we can find, and feed it to the Chinese and their
emerging avatars. Thus, re-primarization can also be seen as responding
to the demand of an extractivist elite. From their kiosks at the Natural Resources Fair, from their platform at the Forum on Mining Royalties, from
the chambers of commerce across Canada, to the halls of the National Assembly, this elite repeats the same refrain over and over: Help us restore
growth by developing the infrastructure necessary for a new wave of natural resource development projects. Following the same old economic logic
studied by Innis, this implies extracting as much as possible, processing as
little as possible, and exporting as much and as far as possiblebecause
the value of the model resides precisely in expanding the circuit. Help us
establish new communities of captive and deterritorialized workers. Finance
the construction of resource transportation and export infrastructure, and,
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finally, turn a blind eye to the environmental damage and risks of this type
of development. Especially considering that, in the current context, this is
the only sector with any potential for growth, development and increased
revenues for the state!
As long as the interdependence in the division of work between extractor and user-processor persists, or until some major innovation comes along
and revolutionizes extraction methods, or until a substitute for raw materials consigns it to oblivion, this staples model based on relative scarcity will
continue to perpetuate the cycle of resource extraction until there are no
more resources left to extract. This paradox of the commodities market has
been exposed notably by environmental economists such as Dennis Meadows, author of, The Limits of Growth: the scarcer a resource becomes, the
closer it gets to its point of depletion (relative or absolute), the more prices
provide an incentive to extract farther and deeper, until the collapse of the
stock (whether ginseng, beavers, cod, spruce or, soon, oil) is completed. If
we do not free ourselves from the extractivist mentality that conditions our
relationship to our own development, our re-primarized economy is doomed
to fall... like ginseng.
A version of this commentary originally appeared in French at revueliberte.ca.
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Staples Theory:
Its Gendered Nature
Marjorie Griffin Cohen
Feminism was the unlikely route for my contact with the staples theory.
I say unlikely because staples development analysis has a structural amnesia to gendered issues. Still, understanding the distinct ways that Canada developed had significant implications for the atypical way labour and
gender were configured in the historical development process.
Interest in womens role in economic development had been in abeyance for a long time after the British feminists early in the 20th century became focused on womens pastspecifically womens contributions to the
18th century industrial revolution. In the early analysis of industrialization,
womens work was understood (both by feminists and others) to be integral
to industrial development in Europe, primarily because women were so very
central to the proto-industrial stage of family manufacturing1, but also because of their dominance in the early factory systems.2
Until the beginning of development literature (dealing with underdevelopment in poor countries) the British understanding of capitalist development was more or less the general understanding of industrial revolutions.
So too were the labour and family configurations associated with them. As
feminism was gaining a tiny toehold in universities in Canada in the 1970s
and 80s, those of us exploring how to teach the Canadian economic past
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on the shape of staples development and how its volatility was managed
within households.
As I said initially, Mels article on the staples theory was immensely influential to my thinking about the gender order in Canada in its earlier periods. But some assertions seem worth questioning now (in hindsight). Two
points that Mel mentions as being important for development are worthy of
note. First is the idea that Canada had a favourable land/man ratio; second
is the notion that because Canada was largely a settler society, it did not have
inhibiting traditions of the sort that restricted development elsewhere. With
labour issues always so very significant because of the low population, it
would seem to me that this land/man ratio was actually a negative factor.
So much land, with so few people, meant that domestic markets were very
slow to develop. Also, while the gender order was in many ways shaped by
the special circumstances of Canadas geography and staple exports, importing labour was necessary to solve the labour problem. Each wave of
European immigrants brought a reinforcement of very traditional gendered
relationships. And these tended to retard the various ways that women had
been integrated into the staples exporting economy. The effect of Englishs
womens immigration on aboriginal women in the fur trade was most obvious, but so too were the traditions from other waves of immigrations from
elsewhere in Britain and Europe.
The significance of export staples to understanding what is most important for the economy in Canada has had resurgence with new developments
in the energy industry. I live in BC, and here the reliance on staples exports
is well entrenched as part of the collective unconscious of policy makers.
For example, I recently attended a high-level one-day conference assessing
future economic directions in BC. The general sense was that the priority
was to generate wealth through gas development and exports (in the form
of liquefied natural gas), assumed by most to be a precondition for allocating funds to the things people need. It seems odd, but there exists an embedded idea that wealth is only created through resourcesand everything
else derives from that. At no point is there recognition of the huge risks of
relying on one export staple for future economic success.
Mel Watkins A Staple Theory of Economic Growth was an inspiration to many of us who used it as a basis for further research into Canadas
economic nature. It inspired subsequent researchers and students, and is
a great article to use in teaching. It thoroughly engages students in a way
that nothing else on Canadian economic history can do: they appreciate its
clarity and immediately see its relevance to the economy today. The staples
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theory is as alive and relevant in Canada now, as it was when Mel wrote it
fifty years ago. If only those in charge of the economy would heed the analysis that Mel and others gave us, they would be much more conscious of
the risks inherent in a staples-dependent approach to growth. Those who
design economic policy for governments should have a wider perspective
than relying on the deepening exploitation of resources. Attention needs to
shift to economic activity that meets the needs of people within this country.
References
Brown, Jennifer. Strangers in Blood: Fur Trade Company Families in Indian Country (Toronto: University of Toronto Press, 1980.
Cohen, Marjorie Griffin. Womens Work, Markets and Economic Development in Nineteenth-Century Ontario (Toronto: University of Toronto Press, 1988).
Collier, Frances. The Family Economy of the Working Class in the Cotton Industry 18741833 (Manchester: Manchester University Press, 1964).
Dechne, Louise. Habitants et marchands de Montral au XVII e sicle (Montreal: Plon, 1974).
Dunlop, E.P., ed. Our Forest Home: Being Extracts from the Correspondence of the Late Frances
Stewart (Toronto, 1889).
Engels, Fredrich. The Condition of the Working-Class in England [1845] (Moscow: Progress Publishers, 1973).
Fowke, Vernon C. Canadian Agricultural Policy: The Historical Pattern [1946] (Toronto: University of Toronto Press, 1978).
Hamelin, Jean. conomie et socit en Nouvelle-France Qubec (Laval: Presses de luniversit
Laval, 1961).
Innis, Harold. The Fur Trade in Canada : An Introduction to Canadian Economic History rev. Ed.
(Toronto: University of Toronto Press, 1970).
Jameson, Anna Brownwell. Winter Studies and Summer Rambles in Canada [1838] (Toronto:
McClelland & Stewart, 1965).
Mackintosh, W.A. Economic Background of Dominion-Provincial Relations [1939] (Toronto: McClelland & Stewart, 1964.
Martineau, Harriet. Retrospective of Western Travel (London: Saunders and Otlers, 1838).
Medick, Hans. The Proto-Industrial Family Economy: The Structural Function of Household and
Family during the Transition from Peasant Society to Industrial Capitalism, Social History 3,
October 1976, pp. 291315.
Moodie, Susannah. Life in the Clearings vs. The Bush (New York: DeWitt and Davenport, 1855).
Pentland, H. Clare. Labour and Capital in Canada 16501860. Ed. by Paul Phillips (Toronto:
James Lorimer, 1981).
Pinchbeck, Ivy. Women Workers and the Industrial Revolution 17501850 [1930] (London: Virago 1981).
Rose, Laura. Farm Dairying (London: T. Werner Laurie, 1911).
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Smelser, Neil J. Social Change in the Industrial Revolution: An application of Theory to the British
Cotton Industry (Chicago: University of Chicago Press, 1959).
Traill, Catharine Parr. The Canadian Settlers Guide [1855] (Toronto: McClelland & Stewart, 1969).
Van Kirk, Sylvia. Many Tender Ties: Women in Fur-Trade Society 16701870 (Winnipeg: Watson
& Dwyer, 1980).
Notes
1This is also referred to as the putting-out system where a family manufactured clothing and
other items from material provided by an industrialist. See, for example, Medick 1976.
2See, for example Pinchbeck 1930, Smelser 1959, Collier 1964, Engels 1845.
3The dominance of English and American academics in the social sciences in particular had
hindered the development of a vigorous research of Canadian issues. This was corrected, as universities were required to offer jobs to qualified Canadians first. Unfortunately, this law, which
was so hard-won, was changed early in the 21st century.
4See for example Dunlop 1889, Jameson 1838, Moodie 1855, Rose 1911, Traill 1855.
5This book is Womens Work, Markets, and Economic Development in Nineteenth-Century Ontario. It was primarily the work I had done for my Ph.D. thesis.
96
Re-reading Staples
Theory in Light of
Current Trade and
Development Theory
Dan Ciuriak
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a new and large extensive margin opens up.2 Lets use switchgrass for biofuel production in Canadas west to concretize the thought.3 Due to breakthroughs in, say, genome sequencing and bioinformatics, it becomes possible to genetically modify switchgrass to generate a substantially higher
biomass potential per acre; at the same time breakthroughs in microbial
conversion of cellulose to ethanol make it possible to derive substantially
higher net yields of ethanol for biofuel use per unit of input. A new and major staple is introduced with large export potential due to expanded ethanol content requirements in EU and U.S. biofuel regulations. At the same
time, the economys industrial sector faces new potential in emerging products such as green energy technology (solar, batteries, etc.) driven by the
same broad societal objectiveclean energy. We now pick up the story in
Watkins article.
Watkins sets out in rather general terms a multi-sector general equilibrium model with three factors of production: land, labour and capital. Since
comparative advantage for the land-intensive economy lies in land-intensive production, namely staples, the expansion of available usable land
shifts the economys comparative advantage towards land and thus to staples. The further economic development of our economy then is a process
of diversification based on exploiting the abundant factor through exporting which generates a spread effect. The latter effect can be readily identified with the spending effect formulated by Corden and Neary (1982) in
their exposition of Dutch Disease: income earned from export of a resource
(staple) drives demand for and production of other products, including inputs to the staple sector and downstream production enabled by the staple
production that is not directly exported. Watkins also mentions that the effectiveness of domestic entrepreneurship depends on the supply of capital
and labour. This hints at the resource movement effect in Corden and Neary,
although there is no clear reference to crowding out of other tradables. Overall, the staples theory can be characterized as a proto-Dutch Disease resource curse theory, albeit with an incomplete exposition of the implications for other tradables and non-tradables.4
In our updated economy, the emergence of comparative advantage in
switchgrass/biofuels would tilt the playing field away from other green
energy technology. While going with comparative advantage results in unambiguous welfare gains for the economy in a static context, there may be
something about the character of the staple that makes it less desirable in
a longer-term growth context. Watkins emphasizes the importance of the
character of the staple and the dynamics that its production induces, in-
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cluding in terms of exposing the economy to the boom/bust nature of commodities, influencing the quality of labour, and the scope for upstream
and downstream linkages. However, while there is mention that the staple
production will be subject to decreasing returns, the fact that the staples
theory focuses only on the character of the staple and not on the character
of the non-staple (because of the new economy context for which it was
formulated), there is no hint of external economies or increasing returns in
other sectors that would more powerfully make the case for policy to support the development of such sectors (in our case, alternative green energy
technology). Interestingly, Watkins mentions Marshall McLuhan but not
Alfred Marshall, who introduced the idea of industrial districts driven by
learning externalities!
Watkins also sketches out a growth model. Factor markets are open and
factors are mobile; accordingly, both capital and labour are free to flow into
or out of the economy. Moreover, foreign direct investment is also free of
restrictions and thus inflows bring technology and foreign entrepreneurship. Nonetheless, the pace of growth is dictated by the pace of exports of
the staple(s). In part, this reflects the fact that most technology is imported
and domestic technological advance is thus dependent on export earnings
(domestic innovation is allowed for but its extent is not explained; there is
a suggestion that it is mainly refinement of imported technology). In part,
however, it reflects the influence of the staple itself on the nature of institutions in the economy.
The endogeneity of the quality of institutions to the nature of the staple
anticipates the recent emphasis on the importance of the quality of institutions in economic growth and the tendency of rent-heavy economies to be
plagued by corruption. The attractiveness of these insights to explaining the
sharply divergent development trajectories in the resource-poor economies
of East Asia versus the resource-dependent economies in Africa and Latin
America is clear. However, the implications of this for our updated land-intensive economy would appear to be more subtle.
One imagines that the switchgrass revolution would generate an ongoing
innovation dynamic in, say, Saskatoons biotech cluster. However, why an
economy that is open to global capital markets should be constrained by export earnings, if there are good growth opportunities elsewhere, is left unclear by the staples theory. One needs additional Dutch Disease-type arguments to explain the crowding out of the innovation-intensive cluster in
alternative green technology. The latter sector might have potentially much
larger longer-run gains due to economies of scale, the development of re-
99
lated products based on the engineering learning-by-doing, and the learning-by-exporting effects that technology exporters would gain from interaction with sophisticated global production chains.5
Perhaps most importantly, as the modern firm-level trade literature emphasizes, the green technology firms that become exporters would be the
more productive firms in their sector and their entry into export markets
would be associated with a number of productivity-enhancing effects. These
effects would include internal economies from adoption of process technology suited for global mass markets and from post-export-market-entry scale
of production, but also industry-level productivity gains as market share is
transferred from the lower productivity firms to the faster-growing high productivity firms.6 These new exporter-starters would be Canadas next generation Bombardiers and Blackberrys. This is perhaps the most important
distinction between exploitation of a land-based extensive margin versus a
technology/firm-based extensive margin, as it provides an insight into why
land-rich economies might tend to grow more slowly in the longer-run than
land-poor economies.
Watkins also touches on development theory. Interestingly, he articulates the idea that development is a process of diversification rather than
specialization according to comparative advantage as an economy integrates
globallyan idea that is nowadays generally credited to Imbs and Wacziarg
(2003). However, Watkins dismisses the infant industry argument (in 1963
already, well before the economics profession had abandoned it!) without
discussion. In particular, there is no comment on the role of the MacDonald tariff on Canadian inter-provincial trade or the role of the McKinley tariff on the New England economy in the late 1800s and early 1900s when
New England took over from Manchester the title of the workshop of the
world (see, e.g., Philadelphias period of industrial pre-eminence around
18801920). As a result, there is no obvious policy hook regarding what to
do about reliance on staples.
***
Ultimately, Watkins (1963) theoretical development of the staples thesis had
little traction in influencing mainstream economic growth theories. The reason may be, as suggested by Krugman (1995; 27), that the influence of ideas
that have not been embalmed in models soon decays. So while Watkins was
able to think through in plain English issues such as the general equilibrium
implications of staples exports, the implications of commodity price booms
and busts as well as of a longer-term decline in the terms of trade, and the implications for labour markets (and by extension for outward migration) if the
100
growth impetus from staples exports was insufficient to meet the job needs
implied by natural population increase (assumed to be exogenous), the inferences lacked staying power because they were not embalmed in mathematics.
But as we revisit Watkins and recognize his insights as well as the incompleteness of the key arguments when transported to a current setting,
it is also important to bear in mind the massive extent of development of
economics in the past half century. Trade economics has gone through two
revolutionsnew trade theory (Krugman, 1979 etc.) and new new trade
theory (Melitz, 2003 etc.). Development economics has been in almost constant revolution in the same period; in fact, if we go by Bradford DeLongs
count, I think we are now in the eighth revolutionwhat might be termed
a counter-reformation against the neoclassical revolution (see DeLong,
2001). When Watkins wrote, the concept of a developmental state had not
yet been articulated by Chalmers Johnson, we hadnt had the Latin and African debt crises of the 1980s, nor the African renaissance of the 2000s on
the back of rising resource prices, nor the coming and going of the Washington Consensus (Williamson, 2004) and the (sort of) arrival of the Beijing
Consensus (Williamson, 2012).
Accordingly, a modern reader visits this text with an enormously different perspective than its writerand yet immediately recognizes many features. And it is those points whose relevance has survived the 50 most intense years of economic history ever experienced to which we need to pay
attention. The enduring insight of the staples thesis is that what you do
as a country heavily influences who you areand that a country may wish
to have an active hand in deciding exactly what it does for a living in the
global economy.
Being a resource-driven economy has not prevented Canada from developing and achieving high levels of prosperity. In that sense, Canada has
largely avoided the resource curseor alternatively broken out of a staples
trap. This does not mean that concern about the heavy role of staples in Canadas product mix was entirely unwarrantedafter all, Canada got to where
it is thanks in part to a long history of industrial policy intervention. Indeed
in 1963, even as Watkins was expounding his staples theory, Canada was
creating the Department of Industry to address the competitiveness problems in domestic industry and was about to enter into the 1965 Auto Pact, a
structured (rather than free) trade agreement with the United States to solve
the scale economy problem in the auto sector. That being said, as the recent
Dutch Disease debate in Canada demonstrates, there are still starkly divided views on whether Canada is sinking back into such a trap.7
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References
Ciuriak, Dan, Beverly Lapham, and Robert Wolfe, with Terry Collins-Williams and John M. Curtis.
2011. New-new trade policy, QED Working Paper, Queens Economics Department. Available
at SSRN: http://ssrn.com/abstract=1814226
Ciuriak, Dan. 2013. Learning by Exporting: A Working Hypothesis, CC Working Paper: current
version 2 January 2013. Available at SSRN: http://ssrn.com/abstract=1926811.
Ciuriak, Dan and John M. Curtis. 2013. The Resurgence of Industrial Policy and What It Means
for Canada, IRPP Insight No. 2. June. Montreal: Institute for Research on Public Policy.
Corden, W. Max and J. Peter Neary. 1982. Booming Sector and De-Industrialisation in a Small
Open Economy, The Economic Journal 92(368), December: 825848.
DeLong, J. Bradford. 2001. The Last Development Crusade: Comment on: William Easterly (2001),
The Elusive Quest for Growth: Economists Adventures and Misadventures in the Tropics,
http://www.j-bradford-delong.net/TotW/Easterly_neoliberal.html, August 2001.
Imbs, Jean, and Romain Wacziarg. 2003. Stages of Diversification, American Economic Review, 93(1): 6386.
Johnson, Chalmers. 1982. MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925
1975. Stanford University Press.
Krugman, Paul R. 1979. Increasing Returns, Monopolistic Competition, and International Trade,
Journal of International Economics 9(4), November: 469480.
Krugman, Paul R. 1995. Development, Geography, and Economic Theory. (Cambridge: MIT Press).
Melitz, Marc J. 2003. The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity, Econometrica 71(6): 16951725.
Watkins, Melville H. 2007. Staples Redux, Studies in Political Economy 79: 213226.
Watkins, Melville H. 1963. A Staple Theory of Economic Growth, Canadian Journal of Economics
and Political Science / Revue canadienne dconomique et de Science politique 29(2), May: 141158.
102
Williamson, John. 2012. Is the Beijing Consensus Now Dominant? Asia Policy 13, January: 116.
Williamson, John. 2004. A Short History of the Washington Consensus, paper prepared for the
conference From the Washington Consensus towards a new Global Governance, Barcelona, September 2425, 2004.
Notes
1A key staple of the North American economy is maize or Indian corn, which was developed
through millennia of domestication and selective breeding by indigenous peoples and spread
through the Americas through trade in varieties. The fur trade was indeed trade and largely between
indigenous economies exporting to Europe via intermediaries such as the Hudsons Bay Company.
2Modern trade economics emphasizes the distinction between the intensive margin (an expansion of trade in existing products) and the extensive margin (the introduction of new products
into trade or alternatively of new firms or new destinations).
3One could use oilsands or diamonds as the example, which Watkins (2007) mentions as recent extensions of staples production; however, these are politically charged areas and raise
complex additional issues related to optimal use of non-renewable resources and the appropriate use of revenues from the sale of such assets which deserve a separate focussed comment, including on the fiscal effects which Watkins (2007) mentions. I leave these issues for other comments and focus on a simpler example which in my view allows for a cleaner exposition of the
main features of staples theory.
4Watkins (2007; 118) notes the need for a fuller treatment of non-traded services.
5For a recent survey of the literature on firm-level learning effects associated with export entry
see Ciuriak (2013).
6For an accessible, non-technical discussion of the new heterogeneous firm theory and the
policy implications see Ciuriak et al. (2011).
7I survey this debate in a working paper under development with a working title The Great Canadian Dutch Disease Debate: Yes, No, Maybe So? (hopefully forthcoming soon!)
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In times of crisis, leading thinkers often reach back to classic texts and
writers for core insights to present policy problems, and so it should be with
Melville Watkins classic 1963 article A Staple Theory of Economic Growth.
Fifty years on, it is striking how the fundamental tenets of the staple theory,
and the risk of getting caught in a staple trap, continue to resonate today regarding Canadas economic outlook. Moreover, a great number of developing countries are also seriously concerned over an economic curse or
disease from resource-dependence.
But it was his subsequent work arguing for strict regulation over foreign
direct investment in Canada that was not only fit for its time, but ahead of
it, in light of the more recent revival of themes such as resource nationalism, state capitalism, industrial policy, and covert protectionism that
have returned to the policy debate. These trends may have yet to fully filter through to Ottawa, but when they do, heterodox economic approaches
may have an opening to press for an overhaul of what Watkins called the
(staple) export mentality that inhibits more diversified Canadian domestic development (p.150).
104
The ongoing relevance of the staple theory may not be all that surprising in an era, perhaps now passing, of an international commodities price
boom that further concentrated economic production in natural resource
sectors in many countries (Haglund 2011). But Watkins contribution also
plays a part in a larger discussion connected to the 20082009 global financial crisisone that forced policy-makers the world over to re-think
the conventional wisdom that placed primacy on unfettered market forces
over the ability of government instruments and institutions to achieve public policy objectives.
The pendulum between state and market is rebalancing towards the former, albeit not as quickly as many progressives would like. One of the underlying sources of the policy re-think has been the rapid emergence of China
as a pre-eminent power in the world economy. This historic change has had
many implications (including, obviously, an impact on global commodity
prices), but it has also demonstrated the power of a state-directed strategy
for industrialization and diversification, with lessons for Canadas own efforts to grapple with the staples challenge.
China is more than just a market for our staples, and Canadian policy
thinkers would do well to imagine a more active, strategic partnership with
China so as to better understand its ambitions to deepen its industrial base
and reach the apex of global production chains.
Kicking-Off a Re-Think
One convenient marker for the fundamental re-think in development and
industrial policy-making occurred in March 2011 at an International Monetary Fund (IMF) conference that sought to distill the policy lessons from
the crisis. Among the leading policy makers and academics in attendance, it was a presentation by former Harvard professor Dani Rodrik that
set the direction and tone for subsequent re-thinking of growth strategies
in the aftermath of financial crisis, particularly for developing and emerging countries.
In this presentation, Rodrik drew on insights first developed by W. Arthur Lewis work on dual economies that equated economic development
with structural change. The core idea was that countries attain prosperity by diversifying away from agriculture and other traditional products, towards modern economic activities, and as this change is underway, overall
productivity is bolstered and incomes expand. Lewis typically stressed the
large differences in productivity between broad sectors of the economybe-
105
tween traditional (rural) and modern (urban) sectorsand noted that this
difference between sectors could be an important engine of growth even if
productivity growth within individual economic sectors was minimal.
In the paper, Rodrik (with Margaret McMillan) identifies this growthenhancing structural change as an important contributor to overall growth
performance. Crucially, he contends that the bulk of the difference in recent
growth experiences in Asian countries versus those in Latin America and
Sub-Saharan Africa can be understood by the discrepancies in the contribution of structural change to overall labour productivity. Thus, while in
Asia high-productivity employment opportunities expanded and structural
change added to overall growth, the opposite has been true in Latin America and Sub-Saharan Africa where labour has moved from more-productive
to less-productive activities (most notably, the informal sector), and structural change has served to reduce rather than increase growth since 1990
(McMillan and Rodrik 2011).
The key to getting the good kind of structural change, it seems, has been
Asias strategic approach to economic liberalization that pragmatically combined promoting new, export-oriented economic activities, while simultaneously supporting other activities that directly compete with imports. Latin American and Sub-Saharan African countries, meanwhile, had generally
pushed through reforms dictated by the so-called Washington Consensus.
The wider point, though, is that since that presentation in March 2011, much
of the global policy community has adopted Rodriks re-working of Lewis
structural change concepts hook, line, and sinker.
Now, the concept of structural change/transformation has been accepted almost to saturation in economic development circles. This is particularly the case (but not only) with multilateral institutions which all recently
published major reports on the issue, such as the World Bank, the African
and Asian development banks, the Organization for Economic Cooperation
and Development (OECD), the UN Economic Commission for Africa (UNECA),
the UN Conference on Trade and Development (UNCTAD), the World Institute for Development Economics Research (UNU-WIDER), the Brookings Institution, and the Initiative for Policy Dialogue, to name a few.
Other major institutional about-faces have occurred, too. The IMF, once
an ardent proponent of financial liberalization, also recently adopted a
new institutional view and is now more accepting of government regulation on capital flows (Gallagher and Ocampo 2013). Moreover, its Back
to Basics website tries to strike a progressive balance over a wide range of
economic issues.
106
A Bevy of Protection
The revival of terms like resource nationalism, state capitalism, etc. in the
mainstream policy lexicon, has led some to believe that industrial policy
107
108
Green
Amber
Red
Total
65
35
306
406
121
31
347
499
Asia (11)
156
100
327
583
BRIC (4)
221
100
477
798
73
48
143
264
Developed (6)
Africa (52)
SourceGlobal Trade Alert (GTA). See, http://www.globaltradealert.org/
countries now see fit to experiment with the cut and thrust of industrial
policies, even if that means challenging a big neighbour. In times past, this
may not have been the case. Back in the 1990s, being an eager pupil of the
Washington Consensus, Mongolia agreed to rescind an export tax on unprocessed wool in exchange for a loan from the Asian Development Bank.
Mongolian authorities are not likely to forget this experience, as these wool
exports would eventually be processed in China (Wade 2010).
109
110
A China Choice
While the return of state capitalism and protectionist leanings are still dismissed in mainstream circles in Ottawa, these trends are increasingly rooted
in emerging countries, among which China retains an obvious leading role.
Canada is not likely to remain immune from these trends indefinitelyand to
some extent, the federal government has already had its brush up with them,
whether in the form of the investment screening of the 2012 CNOOC-Nexen
merger, or the blocking of foreign takeovers of Potash Corp. and MDA Corp.
At some point, Canadian leaders will have to choose between either learning from Chinas development strategy (and actively managing the opportunities and risks it poses), or trying to tear down the China model so that
it poses less of a competitive threat to the current global political and economic status quo. Many moves by Canadian policy makers seem oriented
to the second option, but the first option has not been written-off. Efforts
such as the Canada-China Economic Complementarities Study are welcome, but should only be a first step. The next step should be a more strategic exercise that takes dynamic rather than static comparative advantage
at its heart (Poon 2012a; 2012b; 2012c). This is where heterodox economic
discourse should play a key role.
As has been noted, Canada has a profusion of industrial policies, what
it lacks is a strategy (Ciuriak and Curtis 2013:1). Perhaps a way out is to recognize that, in the past, Canada appeared adept at ensuring that so-called
clandestine U.S. industrial policy (Block 2008) could also benefit Canada.
Whats to stop Canada from doing likewise (but hopefully better) vis--vis
Chinas (less) clandestine industrial policy?
Progressive Canadian analysts not only need to come to terms with Chinas
rise, but given the changing geo-political winds, to find strategic openings
to leverage Chinas industrial ambitions in pursuit of Canadas own public
policy goals on a scale that could not be seriously considered before (renewable energy, for example). After all, China seems well aware that a crisis
is a terrible thing to waste (Rosenthal 2009), and that political-economic
dynamic may be the modern day salve for Canada to help shake-off its inhibiting staple export mentality.
References
Block, Fred (2008). Swimming Against the Current: The Rise of a Hidden Developmental State
in the United States, Politics & Society, Vol. 36 No. 2, June. See, http://innovate.ucsb.edu/wpcontent/uploads/2010/04/Block-swimming.pdf
111
Ciuriak, Dan and John M. Curtis (2013). The Resurgence of Industrial Policy and What It Means
for Canada, IRPP Insight No. 2, June. http://www.irpp.org/assets/research/competitiveness/
industrial-policy/Ciuriack-Curtis-no2.pdf
Evenett, Simon J. (2012). Debacle: The 11th GTA Report on Protectionism, Centre for Economic
Policy Research (CEPR), June. http://www.globaltradealert.org/sites/default/files/GTA11_0.pdf
Evenett, Simon J., Johannes Fritz, and Yang Chun Jing (2012). Beyond dollar exchange-rate targeting: Chinas crisis-era export management regime, Oxford Review of Economic Policy, Vol.
28 No. 2. http://oxrep.oxfordjournals.org/content/28/2/284.full.pdf+html
Gallagher, Kevin P. and Jose Antonio Ocampo (2013). IMFs New View on Capital Controls, Economic & Political Weekly, Vol. XLVIII No. 12, March 23. http://www.ase.tufts.edu/gdae/Pubs/
rp/Gallagher_EPW_Capital_Controls_2013.pdf
Gereffi, Gary (2013). Global value chains in a post-Washington Consensus world, Review of
International Political Economy. http://www.tandfonline.com/doi/abs/10.1080/09692290.20
12.756414#.UnPRuJyk8S8
Haglund, Dan (2011). Blessing or curse? The rise of mineral dependence among low- and middle-income countries, Oxford Policy Management, December. http://www.opml.co.uk/sites/
opml/files/Blessing%20or%20curse%20The%20rise%20of%20mineral%20dependence%20
among%20low-%20and%20middle-income%20countries%20-%20web%20version.pdf
Hancock, John (2013). Taking Global Trade for Granted. Canadian International Council, May
10. http://opencanada.org/features/blogs/roundtable/taking-global-trade-for-granted/
Hochberg, Fred P. (2012). A Wake-Up Call on American Competitiveness, Remarks at the Centre
for American Progress, June 25. http://www.exim.gov/newsandevents/releases/2012/upload/
Hochberg_Competitiveness_Speech.pdf
McMillan, Margaret and Dani Rodrik (2011). Globalization, Structural Change, and Productivity Growth, paper prepared for joint ILO-WTO volume, February. http://www.hks.harvard.
edu/fs/drodrik/Research%20papers/Globalization,%20Structural%20Change,%20and%20
Productivity%20Growth.pdf
Poon, Daniel (2012a). Chinas Move up the Value Chain: Implications for Canada, Canadian
Foreign Policy Journal, Vol. 18 Iss 3. http://www.nsi-ins.ca/wp-content/uploads/2012/04/2012Chinas-Move-Up-The-Value-Chain-Implications-for-Canada1.pdf
Poon, Daniel (2012b). A Pivot to Asia? Canadas Real Globalization, Policy Options, September. http://www.irpp.org/assets/po/canada-in-the-pacific-century/poon.pdf
Poon, Daniel (2012c). Thinking Outside the CNOOC-Nexen Box, iPolitics, August 21. http://www.
nsi-ins.ca/newsroom/thinking-outside-the-cnooc-nexen-box/
Rosenthal, Jack (2009). A Terrible Thing to Waste, New York Times, July 31. http://www.nytimes.
com/2009/08/02/magazine/02FOB-onlanguage-t.html
Stiglitz, Joseph E., Justin Yifu Lin, Celestin Monga (2013). The Rejuvenation of Industrial Policy,
World Bank Policy Research Working Paper 6628, September. http://www-wds.worldbank.
org/external/default/WDSContentServer/WDSP/IB/2013/09/30/000158349_2013093014181
3/Rendered/PDF/WPS6628.pdf
Subramanian, Arvind and Martin Kessler (2013). The Hyperglobalization of Trade and Its Future, Working Paper 3, Global Citizen Foundation, June. http://www.gcf.ch/wp-content/
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Wade, Robert (2010). The Case of Open-Economy Industrial Policy, ch. 6 in Howard Stein, Joseph Stiglitz, Akbar Noman, Kwesi Botchwey (eds.) Good Growth and Governance in Africa: Rethinking Development Strategies, Oxford University Press: London. halduskultuur.eu/journal/
index.php/HKAC/article/view/26/29
Wolf, Martin (2013). Globalisation in a time of transition, Financial Times, July 16.
Wolfe, Robert (2011). Did the protectionist dog bark? Transparency, accountability, and the WTO
during the global financial crisis, Policy report 01, ENTWINED, March. http://www.iisd.org/
pdf/2011/protectionist_dog_bark.pdf
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ferent methods employed for different elements of the analysis, meant that
the staples approach could not be generalised in this way. Staples analysis
thus continued in Canada outside the mainstream, with some limited application to other economies (notably Australia). But the approach remained
essentially of local importance. Yet there is scope for much wider application of the staples approach. In principle it can be used to illuminate analysis of any sector which is important to an economy and its exports. The approach is novel in focusing on the nature of the product and the technical
conditions of production, and on the consequent evolution of institutions
around this production, the role of the state, the distribution of rents and
the character of power relations; these latter influence the prevailing mode
of analysis of the product.
In a paper recently published by the Cambridge Journal of Economics (abstract available at http://cje.oxfordjournals.org/content/early/2013/06/04/
cje.bet021.abstract), we have attempted to show how the staples approach
can be applied in this way to the financial sector and the current crisis. The
product of the financial sector is not a staple physical product in the traditional sense of a raw material. Nor is its production necessarily in a dependent position with respect to export markets; the financial sector itself is a
locus of power. But, using (negative) analogy, we show that, in spite of the
differences, finance has sufficient in common with traditional staples for it
to be illuminating to analyse it using the staples approach.
The financial sector, like staple products in Canada, accounts in many
economies for a substantial proportion of national economic activity and
also for exports. The rest of the economy is dependent on the sector in other
ways too. A key product of the financial sector is societys money (in the
form of bank deposits), in which the state plays a key role. In most economies, the state developed a mutually-supportive relationship with banks,
such that banks were backed up by a lender-of-last-resort facility of the
central bank in exchange for accepting portfolio restrictions. This system
encouraged widespread confidence in the money asset and this in turn allowed banks to supply credit to finance investment. But then the power
exercised by the banks over governments forced a process of deregulation
which changed the structure of the financial sector and greatly extended
the range of its products. At the same time, the increasing use of information technology in financial production facilitated the massive growth
of complex structured products. It also changed practices and processes.
Banks increasingly made loans by credit-scoring rather than the exercise
of judgement and used quantitative models to represent their risk profile
115
(as required by the Basel capital adequacy rules). Trading in financial markets was increasingly automated by means of complex algorithms; the remarkable speed of trading this allowed added to the scope for market instability. Taken together, the way in which production in the financial
sector evolved, with input from deregulation by the state, sowed the seeds
of the crisis which began in 2007. The core products, money and credit to
finance real investment, were under threat because of increasing engagement by banks in other products.
For all its apparent competitiveness, the financial sector has generated massive rents, contributing to the increasing maldistribution of wealth.
Since the rest of the economy is dependent on the financial sector providing its money and also providing credit, governments could not in general allow large banks to fail, since they might bring the entire system down
with them. The prevalence of bailing-out in many economies rather than
bailing-in has meant that the state has taken the brunt of rescuing failing
banks. Further continuing provision of liquidity to banks at low rates has
contributed to the survival of failing banks. But this cheap liquidity has
tended to support financial speculation by existing wealth holders rather
than credit for financing real capital investment. More generally, low interest rates have meant a massive redistribution away from net-saving households while net-borrowing households have sometimes faced higher rates
due to higher perceived default risk.
Finally the power exercised by the financial sector has meant that
their rhetoric has dominated analysis. Thus, for example, fiscal austerity
has been introduced across a wide array of economies to placate the financial sector. High executive pay has been justified as a reward for high
skill levels. Where banks have been nationalised or part-nationalised,
as in the UK, governments have attempted to behave like private sector
owners with a view to a successful eventual sell-off of their stockholdings. This rhetoric is based on analysing banks as generic profit-maximising competitive firms.
This brief analysis has employed a staples approach by focusing on
the nature of the product and its mode of production, on interactions with
the state, on institutional evolution, and on the exercise of power over
rent distribution and over the way in which the sector is predominantly analysed. It is a method of drawing together a range of different types
of analysis. The detail will differ from one national financial sector to
another: the above analysis is indicative rather than universally applicable. But the aim has been to show that the staples approach has much
116
Reference
A. Dow and S. Dow (2013), Economic History and Economic Theory: The Staples Approach to
Economic Development, Cambridge Journal of Economics, doi: 10.1093/cje/bet021.
117
Mel Watkins seminal contribution to the staple theory of Canadian economic growth contains many insights into the key factors that have both contributed to and constrained the pattern of Canadas economic development.
While the various contributions to this discussion have focused on various aspects of its contribution, one of the most significant, but unexplored aspects
concerns Canadas technological underdevelopment. A careful reading of Watkins original article, A Staple Theory of Economic Growth (1963), portends
some of the key themes and insights that have been advanced in the past fifty
years to account for the continuing dependence of the Canadian economy on
imported technology, and its relative technological weakness compared to
other leading industrial countries that enjoy a comparable standard of living.
In the refined version of the staples theory laid out by Watkins, a number of implications flow from the specification of the production function
oriented towards staple production. These include the demand for intermediate inputs, the possibility of further processing and the distribution of
income. These factors, in turn, established the range of investment opportunities open in domestic markets and the extent of diversification that is
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possible around the base of staple exporting industries. Building on Hirschmans work, Watkins argued that the staple economy operates as a form of
multiplier accelerator mechanism which stimulates additional investment
in the domestic economy as a result of three fundamental linkages with the
staple sector: the backward linkage, the forward linkage, and the final demand linkage. The nature of these linkages has been discussed at length in
some of the other contributions and need not detain us here.
The focus of this contribution to the discussion is the impact of these
linkages on innovative capabilities in the domestic economy. Watkins suggests that the key relationship which determines this potential is that between staple production and the supply of complementary inputs in the economy, including entrepreneurship and available technology. While there is
no reference made to Schumpeter in the article, he incorporates a distinctly Schumpeterian perspective by observing that the key factor determining
the degree of entrepreneurship in the economy is the extent to which entrepreneurs can perceive and exploit the emergence of new market opportunities. He also notes that to some extent this entrepreneurial role can be met
by foreign investors in the domestic economy, and that this can make additional technical and marketing skills available to the new economy. However, even at this early stage in his career he points out that the reliance on
external investors raises many doubts as to the adequacy of foreign entrepreneurship. It may flow freely into the export and import trades, but fail
to exploit domestic opportunities. Foreign domination of entrepreneurship
may militate against its general diffusion (Watkins 1963, 57).
An additional challenge can arise from the fact that foreign investors
as entrepreneurs may be biased against investing in domestic activities.
They may prefer to continue expanding their investments in the export industry, or to invest in the import trade. One of the challenges of a staplebased economy is that staple exporters will exhibit a mentality that favors
the continued export of staples resulting in an over-concentration of investment and resources in the export-oriented sector of the economy, thus restricting or inhibiting investment in more domestically oriented sectors or
other export-oriented sectors of the economy. Excessive reliance on staple
exports combined with dependence on foreigners for both investment capital and entrepreneurship may, in turn, produce a domestic economy that
draws excessively on foreign technology, with an inadequate or under-supply of domestic entrepreneurship and technology.
Towards the end of the essay, Watkins vacillates between a certain degree of pessimism about the long-term development potential of a staples-
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121
122
123
124
References
Britton, John N.H., and James M. Gilmour. 1978. The Weakest Link: A Technological Perspective
on Canadian Industrial Underdevelopment. Science Council of Canada, Background Study No.
43. Ottawa: Supply and Services Canada.
Council of Canadian Academies. 2013. Paradox Lost: Explaining Canadas Research Strength and
Innovation Weakness. Ottawa: Advisory Group, Council of Canadian Academies.
Harris, Richard G. 1985. Trade, Industrial Policy and International Competition. Toronto: University of Toronto Press.
Stanford, Jim. 2011. Canadas Productivity and Innovation Failures: Questioning the Conventional Wisdom. In The Canada We Want in 2020. Ottawa: Canada 2020.
Watkins, M. H. 1963. A Staple Theory of Economic Growth. Canadian Journal of Economics and
Political Science 296(2, May): 14158.
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Rejoinder:
Bitumen as a Staple
Mel Watkins
127
It feels good to have written something with a shelf life of half a century. It feels not so good that fifty years on the resource-based structure of
the Canadian economy, and politywith their dependence on global forces
largely beyond our control and with their increasing capacity for environmental degradationhas actually deepened.
Born as an offshoot of Europe that, like other New World colonies, could
not survive without a staple to export to the metropolis, Canada has actually
managed (that is, been mismanaged) to regress to its origins. Sadly, bitumen
is the worst of staples, matched only by asbestos; while it had little overall significance for Canadian economic growth, the governments of Canada
and Quebec, while ultimately banning its use at home, wouldnt ban its exportto poor countries, with weak worker protectioneven until the last
mine in Quebec closed. There is evidently a serious problem of addiction
to resource exports with slight regard of the consequences for the world.
Bitumen is what economic historians have come to call a superstaple,
with an impact bordering on the monocultural. For the New World, the dark
side of cotton and sugar was slavery, with horrifying global consequences.
For bitumen it is extreme climate change and its catastrophic consequences
for the wellness of the world and of all of its species. Slavery was abolished
in the face of protest (only in the U.S. was war required). The same must be
done to the mining of bitumen. (The ingenious comparison of human slavery and present servitude to oil is developed in Andrew Nikiforuks excellent book, The Energy of Slaves: Oil and the New Servitude.)
Oil has a track recordit is, of course, not just a staple export for Canada, and bitumen is not our first export of oiland it is not a happy one.
Compared with almost any other staple anywherefor example, wheat in
western Canada or fish in the Atlantic provincesstudies show oil comes
out second-best even before climate change is factored in. The best of the
linkages is fiscal linkage: royalties and taxes which can then be used to seed
diversified, greener, development. But Canadian governments are too deferential to the oil companies, with their enormous power, too lacking in imagination, to do that. The weakness of linkages in general from oil almost
guarantees Dutch disease and worse. (As I write, the business press, which
has been replete with deniers of Dutch disease, is gleefully reporting that
the falling Canadian dollar is helping those Canadian exports which, only
yesterday, were not being hurt.)
Recent research on resource development for export in poorer countries,
as in Africa, shows considerable scope for active state policies of pursuing
linkages along lines advocated by the late Albert Hirschman. This suggests
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What would staple theory predict about the effects of free trade? It implies that the famous law of comparative advantage so loved by orthodox
theory is very likely to enhance Canadas advantage in existing exports of
resources by improving access to external marketsthe obverse of this being that foreign buyers have improved guarantees of access to Canadian resources, hence, it so happens, virtually ruling out any national energy program for Canadarather than in manufactured goods where Canadian firms
may be too inefficient to export while losing out to imports. In short, the
Canadian economy simply becomes more entrenched as a staples economy.
Indeed, this is a pretty good description of what free trade has done so
far for Canada. It has exacerbated the staples trap as the Canadian variety of
path dependency. It has entrenched a mind set among Canadian elites that
protects them from seeing that they are a big part of the problem.
Innis not only gave us the base for staple theory. He also pioneered the
development of communication studies by examining the impact of media
on human consciousness in terms of space and time. Aware of the long history of empires, he saw media as their staple. Writing in the middle of the
last century, he feared that the spatial had totally trumped the temporal,
that our reach exceeded our graspour understanding, our wisdomthat
we had become dangerously present-minded, prepared to blow up the world
in order to kill communism. He thought that the flourishing of culture, the
good life of communities, depended on a better balance between the spatial and the temporal, less attention to spatial dominance and more to respect for the past and the future. Since Innis wrote, we seem mostly to have
experienced more imbalance.
Meanwhile, oil as a staple has intensified the obsession with space to
the neglect of time. Trade spreads globally and, in corporate talk, gives
us the grand new age of globalization the better to give a good face to the
mad corporate drive to intrude everywhere. Power lies with the corporation
which, in the oil business, tends to have considerable longevity. It exercises remarkable foresight in planning its own bottom line while blithely ignoring the long-term public interestthough the very recent decision of a
number of large American corporations, including Exxon/Mobil, to build a
carbon tax imposed by government into its planning of future costs is good
news. Still, Big Oil counts its known reserves as an asset on its balance sheet,
and keeps trying to find more, though if they are in fact fully used up global
warming could pass all tolerable levels. The reality is a spreading ecological footprint, unambiguously adding to carbon emissions and thereby to catastrophic climate change. The market, the holy grail of orthodoxy, destabil-
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life. Thereby the banality and barbarism of the spatial, so evident in todays corporate discourse and practice of globalization, might be tempered by Inniss plea for time, that has come to mean literally more of it
for us on this planet.
Taylor, in his deep reflections on our secular age (in his book The Secular
Age), foresees in the fullness of our reason and our being certain ecological ethics of our day, particularly deep ecology. Out of this foresight comes
communitasa drawing together as a community which, in its fundamental egalitarianism includes everyone. This underlying community, this
deep solidarity, breaks out in moments of exceptional dangerdanger of
the kind that extreme climate change is already creating. In fact, communal rallying in the face of catastrophes past and present is what Solnit finds,
and documents, in her A Paradise Built in Hell: The Extraordinary Communities that Arise in Disaster.
These may not be the best of times, and they may well get worse, but
there is room for hope if we will but face up to our situation. In Canada, that
means escaping both the staple trap and the carbon trap by weaning ourselves from the export of bitumen.
And, finally, should you be in Los Angeles for any reason, do visit the La
Brea Tar Pits in the city itself. Tar a.k.a. bitumen has been seeping upwards
for thousands of years, during which animals have been trapped and their
bones preserved, with specimens now on display in a museum next to the
pits. School children visit and its a major tourist attraction. Count that as
a linkage of bitumenand, I suppose, should tourists be trapped, the skeletons can be displayed in some distant time as remnants of a civilization
foolishly built round the worship of bitumen.
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List of Contributors
Duncan Cameron is President of rabble.ca where he writes weekly, a member of the Centre for Global Political Economy at SFU, and a former President
of the Canadian Centre for Policy Alternatives where he remains a Research
Associate.
Dan Ciuriak is the director and principal of Ciuriak Consulting, and former deputy chief economist at the Department of Foreign Affairs and International Trade.
Marjorie Griffin Cohen is Professor of Political Science and Gender, Sexuality and Womens Studies at Simon Fraser University, and former Chair of
the B.C. office of the Canadian Centre for Policy Alternatives.
Alistair Dow is Adjunct Professor at University of Victoria and past professor of the Scottish Economy at Glasgow Caledonian University.
Sheila Dow is Emeritus Professor of Economics at the University of Stirling,
and Adjunct Professor at the University of Victoria..
Daniel Drache is Professor Emeritus of Political Science at York University,
and former Director of the Robarts Centre for Canadian Studies. He edited
the centenary edition of Selected Essays of Harold A. Innis, Staples, Markets
and Cultural Change, McGill-Queens University Press, 1995.
Alberta Daniel Gago teaches political economy at the National Universities of San Juan and Cuyo-Argentina, and has written extensively about the
challenges of development and diversification in Argentina.
Hugh Grant is Professor of Economics at the University of Winnipeg, and
co-editor (with David Wolfe) of Staples and Beyond: Selected Writings of Mel
Watkins (Montreal: McGill-Queens University Press, 2006).
Thomas Gunton is Director of the Resource and Environmental planning
Program at Simon Fraser University.
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