Wednesday, 1 June 2011

Extracting Value, Not Just Resources - What Newfoundland & Labrador Can Teach the Rest of Canada About 21st Century Globalization

Facts from the Fringe

by Jim Stanford, Canadian Auto Workers

Extracting Value, Not Just Resources Voisey's-Bay-inquiry/1

Natural resources are increasingly central to Canada's economic trajectory. Our
challenge is to maximize the positive spin-offs from resource developments, while minimizing
the economic and environmental costs. In that regard, imagine two extreme cases: one in which
resource projects generate diversified and lasting benefits, and one in which they do not.

Consider the negative case first. Suppose a resource is discovered in a remote northern
location. Using helicopters, a foreign-owned company flies in necessary capital equipment and
supplies, and even flies in labour. The resource is transported to global markets, also using
helicopters. The profits are exported to the foreign owner, and much of the spending on tools,
supplies, and specialized workers also leaves the country (since these are imported). Canada's
GDP is boosted for a while (until the resource runs out), but much of that wealth never "touches
down" here.

The opposite to this negative "helicopter" model is a strategy that maximizes Canadian
participation in every phase of the development: exploration, investment, production, supply
chain, and transportation. This doesn't happen automatically. It takes deliberate measures by
the developer (prodded and assisted by government) to maximize lasting benefits to Canadians.
Government can invoke all sorts of policy tools in pursuit of this goal, including investment
rules, tax and royalty rates, skills and training initiatives, conscious efforts to stimulate a
domestic supply chain, and even labour relations policies.

In this regard, a recent Newfoundland government inquiry sheds some fascinating light
on the broader social and economic effects of foreign-owned resource developments. The
commission, headed by John Roil, was established last October to investigate the long work
stoppage at the Voisey's Bay nickel processing operation in Labrador. That dispute between the
Brazilian mining conglomerate Vale and the United Steelworkers was subsequently settled in
January. But the issues at stake are much broader, as the inquiry recognized and addressed in its

Newfoundland is a great laboratory for this inquiry. Voisey's Bay comes uncomfortably
close to the "helicopter" model of resource development. It is remote. Workers are flown in for
weeks at a time (including replacement workers which Vale used during the strike). There and
elsewhere in Canada, Vale has used its global bargaining power to drive down compensation and
pensions. That boosts Vale's profits, but undermines the share of resource wealth flowing
through the Canadian economy.

Indeed, Newfoundland's entire economy epitomizes the risks of helicopter-style resource
development. Thanks to oil and other resource industries, Newfoundland's GDP per capita is
high; along with Alberta and Saskatchewan, it is one of Canada's three "have" provinces. Yet
hourly wages are lower than the Canadian average. And personal incomes, shockingly, are still
the second-lowest in the country –$5000 per person per year less than elsewhere in Canada.
Workers' share of provincial GDP (captured in wages and benefits) is lower than any other
province. Profits are sky-high: before the global financial crisis, corporate profits peaked at 37
percent of GDP, a level unprecedented in Canadian history. But not much of that cream ever
flows through the province; instead, it flows directly to head offices, whether in Calgary or Rio
de Janeiro.

So how can Newfoundland keep a bigger slice of the resource pie at home? The
provincial government has been creative and aggressive in its efforts to do exactly that:
negotiating hard with foreign developers to boost domestic content in new projects, investing in
training, and spending expansively on social and economic infrastructure. Now the Roil report
highlights another important avenue: labour relations.

The power of a global mining giant to suppress compensation costs in any particular
location is daunting. Moreover, the inquiry emphasized the risk that global employers may not
reflect and respect Canadian labour relations values. The result is not just industrial conflict;
more broadly, it reduces the share of resource wealth flowing through the society which actually
owned and produced it. The commission recommended specific changes to labour relations
policies, including new powers to solve protracted disputes through arbitration. It also called on
government to use all its policy levers to level the collective bargaining field and push global
firms toward more harmonious labour relations.

The Roil report is a careful and thoughtful attempt to come to grips with concrete
challenges associated with Canada's growing reliance on globalized resource sectors. It should
be studied by policy-makers in all provinces.

A version of this commentary was originally published in the Globe and Mail.


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