Saturday, 10 March 2012

A Tale Of Two Provinces: How Globalization, Not Immigration, Drives The Economy.

Almost since the days of Confederation, Ontario was the country's primary economic engine but now it appears it's Alberta turn.  How times have changed but did immigration have anything to do with that?  Of course not!  Immigration is a response to economic growth not a driver of it.  To fully understand Ontario's decline and Alberta's ascendency one needs to appreciate the forces at work of which immigration has no control over nor influences but merely responds to.

Ontario's economy had a healthy manufacturing sector that provided well paying jobs and middle class lifestyles for many Ontarians granting them an avenue to upward mobility and keeping poverty rates down.  But many of those jobs have been relocated offshore to where the job can done cheaper and at a cost benefit to a business.  This is because of globalization and the technology that now makes this possible.  A business does not need to manufacture its goods in the market it sells in.  A company can have its headquarters in country A, have its products manufactured in countries B, C, and D, and then sell that product in every market in the world.  The Canadian economy is mostly a branch-plant economy and foreign based businesses saw no need to continue manufacturing in Canada in order to sell their products in here.  As a result Ontario's economy has slowly declined over the years as its manufacturing base eroded.  But there's also another culprit to blame: the high Canadian dollar.

Enter Alberta.  Alberta's economy is pretty much a one horse town with oil being it.  And it isn't cheap oil either.  Located in the controversial tar sands it takes the equivalent of two barrels of oil out of three just to keep the show running.  This is grossly inefficient and expensive but as long as oil prices remain ludicrously  high it's economical.

But why are oil prices so high?  Is it because of unrest in the Middle East?  Or has a hurricane in the Gulf States of the U.S. affected refining capacity?  Or is it because of increased demand from emerging economies like India and China?  How about none of the above.

The truth is oil production has pretty much remained constant for quite some time and has been readily meeting any increases in demand.  We shouldn't be paying the prices we do at the pumps nor the increases in prices for basic goods like food and clothing that are also affected by the resulting increase in the cost of production and transportation.  So why the high price of oil?  Well, blame the speculators.

In the year 2000 the Commodity Futures Modernization Act was born.  This piece of deregulation removed the constraints in the futures market that kept speculators in check and prevented them from artificially inflating or deflating commodity prices; prices that were primarily set by the forces of real supply and demand.  With the constraints removed the futures market became a speculator's playground and the fruits of this deregulation are Enron, the U.S. housing bubble, and the high price for oil.

Since Canada is an oil producing nation as well as a trading nation we buy and sell our oil on the world market at world market prices.  But in order to buy Canadian oil, or any Canadian commodity, a buyer is going to need Canadian dollars to do so and the higher the price for the commodity the more Canadian dollars a buyer is going to need.  An increase in demand for an finite supply of Canadian dollars leads to a higher valuation of the Canadian dollar.  This is good for Canada's mining and oil industries but it hurts our exporting and manufacturing capacity.

So what does any of this have to do with immigration?  The answer is nothing and that's the point.  Immigrants are not a reason for Alberta's oil driven economic boom and immigrants had nothing to do with Ontario's manufacturing might nor were they able to prevent its weakening.  If they are to take credit for anything it's Canada's housing bubble.  Ontario's and Alberta's economies are affected by global events and decisions made in other nations that immigrants have no control over and even less influence.  Immigration is merely a response to economic growth, not the driver of it.

And now immigrants are skipping Ontario to head west to the golden plains of Alberta to enjoy the speculative run on oil while it lasts.  Why is that?  It's like I said: immigrants are a response to economic growth, not a driver of it.  Were that so then Ontario should be doing fine.  But it isn't because immigrants don't grow jobs, they take them.

We are always being told that Canada is dependant on immigrants for job growth.  This is an intentionally misleading use of two positive sounding words.  By juxtaposing "job" alongside "growth" we are given the mistaken impression that immigration is a source of job creation.  This is false.  Immigrants don't create jobs, businesses do through expansion and investment during favourable economic conditions.  If immigrants do create jobs it's mostly for themselves, family members, and fellow compatriots but for the most part immigrants don't create jobs for Canadians; the Frank Stronachs are as rare as Haley's Comet.  It's more correct to say immigrants increase labour supply and labour market competition.  And the more labour available, the more competition, the cheaper it is.

The assumption that a large domestic population is essential for economic prosperity is archaic and no longer holds true in today's world.  It may have been true at one time in Canada's history but no longer.  A large domestic population is not going to help Research In Motion (RIM) beat Apple in the tablet market nor help it become more competitive as a business.  Both companies are competing for market share that extends beyond the borders of the nations in which they are based.  Even the U.S. film industry has to confront this economic reality where foreign markets are just as, if not more, important than the domestic market (it being the U.S. and Canada).  If Sweden's 9.5 million population base (smaller than Ontario's 12 million) can give us Ikea and H&M then Canada didn't need 33 million people to produce Lululemon.

The only businesses that gain from a large and increasing population are those that are national, provincial, or local in scope.  This would be Roger's Communications whose ethnic specific packages make clear the company sees immigrants as a source of an ever increasing customer base.  Another is Tim Hortans that failed to break the American market and is now in greater need of immigrants as both customer and employee.  Other's are the media who need a growing population of eyeballs to sell to advertisers (which is why you almost never read or see a report about immigration not biased towards a liberal and lax system).  And of course there's the real estate industry and the financial sector.

It's a dated and misbegotten belief that a large domestic population is needed for a healthy economy in today's interconnected world.  This is one of the conclusions Don Drummond - the man now charged with giving Ontario the bad news - arrived at when he was working for TD bank.  [He also notes that immigration cannot positively affect an ageing society; that the skills shortage is "over dramatized"; that evidence to the claim that immigrants open foreign markets to Canada is sparse {in fact it's the reverse as immigrant communities - the overseas populations of foreign nations - make Canada an import market for foreign goods}; that immigration contributes positively to Canadian's standard of living is not an established fact.]  When nations with much smaller populations like Finland, Sweden, Switzerland, Austria, and Singapore can compete with Canada in terms of standard of living, innovative capacity, and productivity levels we should abandon our stubborn adherence to the dogma of perpetual, immigrant driven population growth and consider the merits of population stabilization and possibly even decline.

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