Thursday, August 23, 2007

The Alberta advantage, continued

The disparities in Canada between an economically dynamic and demographically relatively buoyant province of Alberta and the rest of the country that I wrote about last year have, if anything, only grown. A recent recent report by the Centre for the Study of Living Standards has suggested that strong economic growth in the western provinces of British Columbia and Alberta has driven high levels of internal migration, the result reallocation of Canada's labour force resulting in net benefit for the country as a whole but net losses for the other eight of Canada's ten provinces.

The study estimated that interprovincial migration boosted the overall output of the Canadian economy by about $2-billion last year as unemployed people who moved found jobs, and as employed workers moved to provinces and jobs with higher productivity levels. And it accounted for nearly six per cent of economic growth last year, up 2.6% over the 1987-2006 period.

While the migration of workers has surged in recent years, the study found there were gains in both net economic output and productivity due to interprovincial migration in all years in the 1987-2006 period. Last year, higher output per worker accounted for about two-thirds of the gains, while the increase in employment in provinces that gained workers accounted for the rest, the study said.

"Despite large net gains at the national level, only two provinces actually had net gains whereas eight had net losses," it said, estimating the increase in economic output for Alberta at a significant $4.6-billion, and for British Columbia at a modest $238.4-million.

[. . .]

When the average worker moves from a less productive to a more productive region, the worker's productivity rises and the difference can be attributed to migration. When persons not employed in one province move to take a job in another all their output can be attributed to migration, it says.

Interprovincial migrants also were much more likely to be in the 15-44 prime working age group, tended to be more educated, and enjoyed greater increases in earnings than non-migrants.

Meanwhile, the loss in potential GDP last year in the other eight provinces, assuming all the workers who left were employed, ranged from $1.4-billion in Ontario and $487-million in Quebec, to $303-million in Manitoba and less than $200-million in each of the others.

Alberta's recent spell of strong, labour-intensive economic growth is partly associated with the exploitation of the Athabasca Tar Sands, potentially a major source of oil and other petrochemicals after processing and now economically viable in the context of high world prices for oil, but is now more broadly diversified beyond oil. This contrasts sharply with the relative weakness of other regional economies in Canada, a phenomenon with many causes. In the case of the province of Ontario, competition of between the goods of heavily industrialized province and Chinese exports is responsible for weak GDP per capita growth: "[W]hile the Ontario economy was growing at an average pace of 2.2% per year, the population was increasing by 1.2%, meaning that real GDP per capita (standard of living) was growing about 1.0% per year on average. This was well short of the 1.7% Canadian average, let alone the 3.0% per year pace for Alberta." Ontario's weakness and the relative decline of British Columbia over the 1990s leaves Canada, in one observer's words, with only "one and a half" "have" provinces.

The ironic thing? Even with the ongoing population shift, Alberta is still experiencing labour shortages which might very well stall economic growth, as Nicholas Köhler explained earlier this month in the newsmagazine MacLean's.

Alberta is wracked by a labour shortage, its jobless rate hitting a historic low of 3.4 per cent last year. The Conference Board of Canada predicts that, by 2025, Alberta will be short as many as 330,000 workers; other forecasts are more dire, envisioning a demand for 400,000 more labourers by 2015. (So frustrated are some by a lack of bodies that, in an interview with Maclean's, one observer charged Dave Bronconnier, the mayor of Calgary, with throwing too much manpower at the city's current infrastructure works.) Above those local considerations, prices for raw materials jumped worldwide. Driven largely by insatiable China, steel prices, for example, rose by 70 per cent in the past five years.

The result has been oil sands overruns -- and even the occasional surrender to circumstance. Capital costs have tripled in a decade, and doubled in the last three years. Last summer, Shell Canada Ltd., now wholly owned by Royal Dutch Shell PLC, said costs for expanding the Athabasca Oil Sands Project would rise as much as 75 per cent from earlier estimates, to $12.8 billion. Next, Nexen Inc. said costs at the Long Lake project would drive estimates up 20 per cent, to $4.6 billion. Canadian Natural Resources Ltd. said in March it wouldn't move on plans to build a bitumen processing plant, or upgrader. Synenco Energy Inc., meanwhile, shelved its upgrader in May. "I don't think it's an anomaly," says Mark Friesen, a Calgary-based analyst at FirstEnergy Capital Corp. who subtitled a recent report on Synenco "A Warning Shot Across the Bow for Oil Sands Economics." "I think it's an indication of how difficult the environment is. If we're not careful, more projects may end up being delayed or cancelled."

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