Economic Diversification Alberta Style Presentation to ABCtech AGM June 24, 2010 By Jason Brisbois, Chief Economist Western Centre for Economic Research

Presentation Outline Why Diversify? Alberta’s Policies Since 1970 Measuring Diversification Comment on Investment and Productivity 2Western Centre for Economic Research

Why Diversify? Debate is not new – started in the 1920s More intense during bust periods Economic view - NR extraction does not make economy wealthier (liquidating an asset) Specialization is an option No formula for ideal diversification levels – vertical and horizontal dimensions Western Centre for Economic Research 3

Policy Objective Take: Aggregate and Per Capita Growth Add: Policy Induced Structural Change that Moderates Impact of Shocks To Achieve: Stable Growth (GDP and Employment) with Reduced Volatility Leading to Higher Living Standards 4Western Centre for Economic Research

Public Misconception Same government, same policies Past 30 years suggests this is not true Alberta has been a textbook of different approaches – but less consistent than some jurisdictions Western Centre for Economic Research 5

Early Lougheed Era 1971 PC platform: New Directions for the Seventies Premier Lougheed in the Legislature, 1974: As a province in transition, we should diversify and become less dependent upon natural resources Decade of economic investment: Pacific Western Airlines, Alberta Energy Company, Prince Rupert Terminal, Alberta Opportunity Company, Agriculture Development Corporation, Alberta Home Mortgage Corporation, By early 1980s losses were an issue 6Western Centre for Economic Research

Later Lougheed/Getty Era 1982 recession – six quarters of decline 1984 Budget – Alberta is in a transition from a period of super heated artificially high growth to one of more normal, sustainable growth Premier reassesses economic strategy… 1984 Proposals for an Industrial and Science Strategy for Albertans 1985 to 1990 – how involved should government be? 7Western Centre for Economic Research

Klein Era 1993 Premier Klein – Seizing Opportunity: Alberta’s New Economic Development Strategy Focus on creating the “right climate” as opposed to direct intervention Alberta Economic Development Authority created 1995 to 2005 – variety of consultations, strategies, updates, target sectors and technology commercialization initiatives 8Western Centre for Economic Research

Stelmach Era 2006 Premier Stelmach –  Alberta’s Action Plan: Bringing Technology to Market  Productivity Alberta  Alberta Enterprise Corporation  Innovation Vouchers  Revised Sector Strategies 2009 – Premier’s Council for Economic Strategy 2010 – Alberta Competitiveness Act 9Western Centre for Economic Research

Measuring Diversification Progress Easier said than done External factors have big impact: recessions, policy changes, market access, price shocks Reliable time series data can be scarce: GDP, employment (preferred measure), export products and markets 3 main methods  Location Quotient – compares regional employment shares to national level by industry  Shift Share – compares regional employment growth rates to national rates by industry  Portfolio Choice – examines employment variance and co- variance across industries over time within a region Western Centre for Economic Research 10

Measuring Diversification in Alberta Three periods: ; ; Method - Portfolio Analysis/Employment Variance within and Covariance across sectors Data - Labor Force Survey (more detailed and consistent than GDP)  16 sectors of activity covered  5 goods, 11 services 11Western Centre for Economic Research

Key Economic Changes PeriodKey Changes recessions National Energy Program terms of trade bubble recession FTA and NAFTA Crow Rate gone recession terms of trade bubble 12Western Centre for Economic Research

Total Variance Relative to Employment Growth Selected Periods: 1976 to 2009 (annualized percent change) 13Western Centre for Economic Research

Total Variance Relative to Employment Growth Two Most Recent Periods (annualized percent change) Terms of Trade Bubble Productivity and Capital Spending 14Western Centre for Economic Research

Productivity and Investment For Alberta’s labour productivity growth was one-third above the national rate. And, private capital formation for M&E and non- residential building was 14% of GDP. For the rate of capital formation increased to 24% of GDP (in the range of China). But growth in labour productivity was the worst of any province and three-fifths of the national rate. Western Centre for Economic Research 15

The Policy Dilemma Productivity in manufacturing and the services were at, or near the top, nationally. This bodes well for greater stability and future living standards. Poor productivity performance is explained by the energy sector—most specifically the oil sands where most of the province’s investment occurred. How do we explain that oil sands is not a high productivity industry (at least at this stage) What future direction should economic policy take? Western Centre for Economic Research 16