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Canadian Public Policy

Socialists, Populists, Resources, and the Divergent Development of and Author(s): J. C. Herbert Emery and Ronald D. Kneebone Source: Public Policy / Analyse de Politiques, Vol. 34, No. 4 (Dec., 2008), pp. 419-440 Published by: University of Press on behalf of Canadian Public Policy Stable URL: http://www.jstor.org/stable/25463632 Accessed: 09/06/2010 14:12

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http://www.jstor.org Socialists, Populists, Resources, and

the Divergent Development of Alberta and Saskatchewan

J.C. Herbert Emery

Department of Economics University of Ronald D. Kneebone

Department of Economics and Institute for Advanced Policy Research

Quand gouvernement canadien, en 1905, a divis? un territoire pour cr?er les de la Saskatchewan et de I'Alberta, il a fait en sorte que les deux nouvelles entit?s aient une superficie, une population et un niveau ?conomique ? peu pr?s ?quivalents. Une centaine d'ann?es plus tard, VAlberta a une population qui est le triple de celle de la Saskatchewan, et son produit int?rieur brut est plus de quatre fois plus important ? que celui de sa voisine. L'?tablissement de cette fronti?re constitue un ph?nom?ne naturel ? qui peut nous aider aujourd'hui ?mieux ?valuer l'importance relative des institutions et de lag?ographie, parmi les ?l?ments qui expliquent le d?veloppement diff?rent de chacune des deux provinces jumelles. On croit souvent que c'est le climat politique particulier de la Saskatchewan qui a frein? son d?veloppement en comparaison de ce en qui s'est produit Alberta. En r?alit?, l'apparition rapide d'un secteur manufacturier en Alberta, et le fait son se en ressources une que sous-sol soit r?v?l? riche constituent explication beaucoup plus convaincante.

: Mots cl?s d?veloppement, institutions, politiques publiques, ressources naturelles

Canada's federal government established the provinces of Saskatchewan and Alberta in 1905, making them approximately equal in , population, and economy. Roughly one hundred years later,Alberta has three times the population of Saskatchewan and a (GDP) that is more than four times a greater. The creation of the border represents "natural experiment" that allows us to assess the relative of institutions versus to importance geography explain the divergent development of the twin provinces. While the perception persists that Saskatchewan's political climate hindered that 's development relative to it is Alberta's, Alberta's early lead in manufacturing, and vast mineral endowments, that present a more convincing explanation for the divergence.

Keywords: Development, institutions, policy, resources

Canadian Public Policy -Analyse de politiques, vol. xxxiv, no. 4 2008 420 J.C. Herbert Emery and Ronald D. Kneebone

Introduction languages, social norms, currency, financial systems, international trade policies, and structures of gov In 1905, 's federal government established ernance. The two economies are integrated with a a political boundary that divided the Northwest very high degree of mobility of capital, labour, and are Territories into two provinces, Alberta and Saskatch goods. Both economies small, , and depend ewan, making them approximately equal in area, ent upon external sources of capital to develop and population, and economy. Roughly one hundred exploit their natural resources. Both provinces are years later, Alberta has three times the population distant from coastal ports and are dependent on com of Saskatchewan and a gross domestic product mon rail networks. Finally, the provinces share the (GDP) that is more than four times greater. It ap same and climate. pears that the placement of the provincial border established the conditions for a "natural experi What was not known in 1905 was that the loca ment," one that has now run for over 100 years, in tion of the border would result in one province, which the importance of institutions can be assessed Alberta, receiving the greater share of the endow against the importance of geography in determin ment of oil, , and coal found in the region. ing the pace and level of economic development. Beginning in 1947, a series of discoveries indicated The literature which has addressed this issue through thatAlberta controlled large pools of crude oil and international comparisons finds that geographic fac natural gas.2 Alberta's early advantage in the form tors such as climate, latitude, distance to a coastal of much larger reserves of oil and natural gas would or port navigable waterways, and mineral endow appear to be an obvious explanation for the differ ments are important for explaining relative income ence in the economic development of the two levels and income growth through their effects on provinces. However, Saskatchewan also contains transport costs, disease burdens, and agricultural substantial quantities of natural resources in the form productivity (Gallup, Sachs, Mellinger 1999; of oil, natural gas, , and . In fact, Mitchener and McLean 2003; Rappaport and Sachs Saskatchewan is today estimated to have 75 percent 2003; Sachs 2003). The literature also suggests that of the world's reserves of potash, originally discov institutional quality provides a convincing explana ered as a by-product of oil exploration in the 1940s. tion for the variation in economic outcomes Similarly, deposits of uranium, first discovered in (Acemoglu, Johnson, and Robinson 2001, 2002; the 1930s, are such that Saskatchewan is today the Rodrik, Subramanian, and Trebbi 2004). Disentan second largest producer in the world. gling the causal channels of these influences on economic development in international comparisons The other ingredient in the natural experiment is is difficult due to the number of factors that can vary a social-political one. Marchildon (2005,4) suggests in the experiment, the small set of countries that are that the border resulted in contrasting identities for suited to analysis, and the potential endogeneity of the residents of the twin provinces. Marchildon de institutions and policies to physical geography. scribes the stereotypes of "collectivist-inclined social democrats in Saskatchewan who emphasize In this light, our comparison of the Canadian security and egalitarian social development" versus provinces of Alberta and Saskatchewan stands to the "entrepreneurial 'small c' conservatives... dedi make an innovative contribution to the literature cated to the individualistic pursuit of and addressing geography and economic development.1 prosperity."3 On the basis of these perceptions, ide are as the Unlike comparative studies of national economies, ology and government policy often raised in our study the set of conditions for the provincial explanations for the divergence of incomes between

economies which satisfy the ceteris paribus assump the provinces. Thus, Tyre (1962) asserts that ideo tion is large. The provinces share common logical and political divergence arising after the

- Canadian Public Policy Analyse de politiques, vol. xxxiv, no. 4 2008 Socialists, Populists, Resources, and the Divergent Development of Alberta and Saskatchewan 421

was reason of an that Alberta's lead in manu the for the economic argument early rise of Alberta, the under-performance of Saskatch facturing development, and the fact its mineral are were discovered are the reasons ewan's economy, and why there few large endowments first, for its economic In our corporations in Saskatchewan. The perception per leadership. assessment, ge sists to this day that socialist policies enacted by ography, not institutions, is responsible for the an Saskatchewan's governments are important part divergent outcomes of the twin provinces. of the explanation for Saskatchewan's perceived to Alberta's We that our has for under-performance relative rise.4 believe analysis implications two distinct Canadian-policy bodies of literature. Political ideology is often cited as an explana First, for the literature that examines the potential tion for differences in economic development for economic gains from the removal of interpro resource a because, as the experience of many vincial trade barriers, and hence reduction in the a dependent economies has shown, government influence of provincial borders; the lack of border policies can play a key role in encouraging or dis effect on long-run development outcomes suggests couraging investment. This is especially so for that the costs of trade barriers may not be large for policies introduced early in the development process Canadian provinces (Fox and Roach 2003; Beaulieu, and regarding economic activities where profits are Gaisford, and Higginson 2003). Second, a smaller higher and production is spatially concentrated (ag body of literature that examines provincial borders glomeration economies). Tax policies and from the perspective of "optimal" policy areas has can or de not to assess regulations encourage discourage location been able whether changing provin cisions and in this way give spark to (or extinguish) cial boundaries can be associated with changes in in agglomeration economies. Decisions made early the incomes of residents of the affected political the development process with respect to the issue jurisdictions (Emery and Kneebone 2003; of public versus private ownership of resources are Di Matteo, Emery, and English 2006). Our work also identified as predictors of future economic suggests that there are unlikely to be growth effects or even success. associated with a change in, removal of, so provincial boundaries; these studies have not, in

In this paper, we evaluate the relative roles of fact, omitted an important policy effect. influences in the form of political ideology, public ownership of resources, and resource endowments to explain the different economic trajectories of two The Natural Experiment from the 1905 economies initially similar in terms of economic Boundary Decision prospects. Our analysis shows that while the rheto ric of the political leaders of the two provinces may In 1905, the Canadian federal government set the a an an have differed, except for short time during im stage for interesting natural experiment. The portant period of their economic development, there government established the provinces of Saskatch has been little difference in the policies pursued by ewan and Alberta by drawing a border that divided the governments of Alberta and Saskatchewan with a region into two halves approximately equal in re respect to the development of natural resources. Any area, economy, and population.5 The mineral claim that institutions played the key role in explain sources that would prove to be economically ing the difference in economic development in the important for the provincial economies after the on an two provinces must therefore rest argument Depression of the 1930s were not discovered in own that differences in policy practiced during that criti 1905, and the provinces did not the natural re cal period had a substantial and prolonged influence. sources within their jurisdiction until 1930. In We examine that possibility and dismiss it in favour addition, the populations of the two provinces had

Canadian Public Policy -Analyse de politiques, vol. xxxiv, no. 4 2008 422 J.C. Herbert Emery and Ronald D. Knee bo ne

shared the same government until 1905, and the lo tributed to concerns regarding the balance of politi cation of the border was not set to serve cal across or even ideological power provinces, perhaps the or cultural differences within the populations. The maintenance of political power in the existing a boundary decision satisfies the requirements for provinces.8 valid natural experiment because of the exogeneity of the boundary location to resource endowments In 1905, the federal government intro and socio-political factors. duced legislation that created two provinces out of the . What was apparently a By 1897, Canada's population was expanding crucial consideration was also a political one: the through the prairie region of , a re government held the view that the Northwest Terri gion known at the time as theNorthwest Territories. were "altogether too large an area to be made Immigration policy, which was the jurisdiction of into one single province according to the size of the the federal government, contributed to this popula other provinces" (Owram 1979, 277). Despite the tion growth but the responsibility for providing local fact that there was considerable variation in the geo works and improvements was the responsibility of graphic sizes of the existing seven provinces in 1905, the territorial government. Predictably, a growing itwas argued that where the federal government had population and the financial problems that came with control over the creation of new provinces, it should

it led the territories to pursue provincial status. endeavour to make the new provinces about the same While the economy of the territories was agricul size as those currently in existence (Lingard 1946, tural, considerable diversity in agricultural activity 199).9 A north/south border was positioned that cre and economic interests existed across the plains. ated two provinces roughly equal in size by area Nicholson (1954) described the southern part of the (715,000 square kilometres each). territories as largely flat, treeless prairie suited to

large-scale grain growing and ranching, whereas the To the extent the territories had been divided to area was land north of this rolling, treed, well-wa better serve the diverse interests that existed in the tered and suitable to mixed farming and smaller west, the placement of the border was somewhat a farms. Not surprisingly, such clear delineation of remarkable in that it created two provinces with economic interests by geography resulted in a pro roughly equal acreages suitable for grain growing, posal for the creation of two provinces with a border ranching, and farming (Lingard 1946). running east and west. But other proposals were From the outset, the position of the border was criti made for the creation of one, two, three, and even cized for having divided the ranching country in the

four provinces. south (Nicholson 1954; Owram 1979). The on 23 February 1905 expressed the opinion ... From the outset, the establishment of the new that the "dividing line is wrong, placed there evi provinces reflected two competing principles; effi dently in an arbitrary manner without consideration ciency in administration versus the separation of and without regard to the physical features of the diversified interests.6 Opponents of the proposal for country or its agricultural and grazing qualities" the establishment of a single province argued that a (Owram 1979, 291). single province would be too large to efficiently manage, and that interests across the vast territory With respect to the location of the border and were too diverse.7 The creation of one province was endowments of mineral resources that would prove also criticized on the grounds that it would be too to be important to the provinces after the Depres big to maintain political balances within Confed sion, the discovery of those resources occurred after eration (Marchildon 2005, 3). The pace of World War II. Even if the discoveries had occurred population growth in the territories after 1896 con earlier, the property rights to the natural resources

- Canadian Public Policy Analyse de politiques, vol. xxxiv, no. 4 2008 Socialists, Populists, Resources, and the Divergent Development of Alberta and Saskatchewan 423 within the two provinces, and hence the capacity to 2004). The provincial governments lacked the nec use natural resources as a tool for development, were essary public capital to develop the resource on their not transferred to Alberta and Saskatchewan until own. Further, the risks inherent in oil and gas ex 1930 (Boothe and Edwards 2003, 93-7). As we dis ploration proved unpalatable for provinces emerging cuss below, the timing of discovery also post-dates from the debt problems of the 1930s (Hanson 1958; the chosen approaches to resource development in Richards and Pratt 1979; Johnson 2004). Finally, as the two provinces, which allows us to interpret sub domestic sources of capital were not well developed, a sequent economic outcomes as consequence of external private capital that produced the oil had policy. credible exit threats.13

InAlberta, the government, newly Ideological Divergence and Convergence formed and newly elected in 1935, sought to diver sify the economy by building upon the nascent oil The provinces' shared experiences of economic dev industry that had been established as a result of the astation, drought, and out-migration during theGreat small, and by then declining, production of oil in Depression impressed upon both their governments . To do so, it sent assurances to the the need to diversify their economies away from financial sector and the oil industry that the province .10 Their initial approaches toward eco would provide every incentive to risk capital, and it nomic diversification would, however, prove to be established a regulatory regime that emphasized ] a re very different.1 Under the "populist" Social Credit private-property rights and generous royalty government elected in 1935, Alberta would respond gime (Hanson 1958; Richards and Pratt 1979).14 In by enabling the tools of capitalism to better serve the same year as the discovery of the large oil pool Albertans by favouring policies to encourage exter at Leduc in 1947, Alberta's Social Credit govern nal private capital to locate in the province. In ment passed the Mines and Mineral Act that Saskatchewan, the victorious socialist committed the provincial government to a relatively Commonwealth Federation (CCF) party in the 1944 low maximum royalty rate equal to just 16.67 per provincial election embarked on an economic pro cent of gross production (Doern and Toner 1984). gram initially favouring and public When the 1950s saw a glut on world oil markets, ownership. The CCF declared that the resources of with the result that Alberta's oil industry was pro were the province to be developed to benefit the citi ducing at less than 50 percent of potential, the zens on of Saskatchewan, rather than external tried to impress the international com capitalists. munity that, unlike theMiddle East, Alberta was a stable place for long-term investment in oil and gas Prior to the discovery of the large oil pool at (Richards and Pratt 1979).15 To prevent the estab Leduc in 1947, relatively little crude oil was pro lishment of federally incorporated pipeline duced in Alberta, and even less in Saskatchewan.12 companies in the province, Alberta established in Natural gas was produced in small quantity inAl 1954 a joint public-private enterprise, Alberta Gas berta but no substantial quantity of gas would be Trunk Line (AGTL), to gather and distribute gas to produced in Saskatchewan until the mid-1950s. export markets. The mix of private and public own Playing a role in shaping public policy in both ership of AGTL reflected a conscious decision to was provinces the market power of private energy reject complete public ownership in the form of a producers. Until the early 1970s, US oil and gas Crown corporation. firms, as developers and producers of oil and gas, are to a generally deemed have had great deal of Initially, the CCF's approach to developing Sas resources bargaining power (Richards and Pratt 1979; Chastko katchewan's natural departed dramatically

- Canadian Public Policy Analyse de politiques, vol. xxxiv, no. 4 2008 424 J.C. Herbert Emery and Ronald D. Kneebone

from that of the Social Credit party inAlberta. While socialization, but only under certain defined circum the CCF would not win election in Saskatchewan stances" (Johnson 2004, 30). Premier Douglas until 1944, in the 1934 and 1938 provincial elec argued that should be expanded tions, CCF candidates campaigned on a platform of upon when needed to prevent monopoly and exploi social ownership of all major industries.16 At the tation of the public.19 Douglas believed that July 1933 CCF National Convention, the party un royalties and land-rental regulations would be suf veiled its "," which stated that the ficient to capture a fair share of resource revenues. party sought to "replace the current capitalist sys tem" with a social order based upon economic From 1944 to 1948, the newly elected CCF sought equality.17 Among other things, it called for natural to promote Saskatchewan's economic diversification resources to be developed for the public benefit, and through nationalization and promotion of second "not for the private profit of a small group of own ary manufacturing and natural resources. The 1944 ers [or] financial manipulators" (Zakuta 1964,162). Natural Resources Act gave theMinister of Natural However, the manifesto made it clear that a policy Resources power to "acquire any lands or works by or as of outright confiscation would not be pursued purchase, lease expropriation" necessary to (Zakuta 1964, 162). develop and utilize the resources of the province (Richards and Pratt 1979, HO).20 The 1944 Min By 1944, the CCF's Natural Resources and In eral Taxation Act imposed a tax on undeveloped dustrial Development Committee identified the freehold mineral rights to encourage holders of the natural-resource sector as the central candidate for rights, which were granted by the federal govern social ownership.18 The committee recommended ment, to allow the rights to revert to the province that the government acquire those mineral rights that (Richards and Pratt 1979, 110).21 Failure to pay the were privately owned, prevent further private own mineral tax resulted in forfeiture of the mineral ership of natural resources, and plan for the eventual rights to the Saskatchewan government. A resolu and complete socialization of all natural resources. tion adopted by the CCF party at its 1946 convention The 1944 CCF election platform (the Program for called upon the Government of Saskatchewan to Saskatchewan) stated that the party would proceed place oil and natural gas under social ownership, to public development and ownership of the natural control and operation (Johnson 2004, 129). Similar resources (Johnson 2004,44). However, the program resolutions were approved in 1947 and 1948. By made no mention of the committee's recommenda October 1947, mineral rights in undeveloped areas tion that privately owned resources should be were seized by the Saskatchewan Department of restored to the province. Yet the committee also Natural Resources. made mention of collecting royalties and taxes from privately owned enterprises, making it unclear A notorious episode in Saskatchewan history whether full socialization would ever occur. occurred in 1944 shortly after theCCF had won elec tion to power. , Canada's major oil In the 1944 election campaign, Douglas and his company, approached the CCF government with a colleagues were forced to defend and clarify the proposal for a long-term contract that would give CCF's policy on socialization. The main focus of the company exclusive exploration rights over a the party in 1944 appears to have been the develop large section of the province should it find commer ment of resources, rather than socialization. The cial volumes of oil. While the government's own Saskatchewan CCF Committee on Socialization of advisors suggested that turning down the offer would Industry and Natural Resources stated that "indus delay exploration and possible industrial develop try should not be socialized for the sake of ment for many years, and that the risks inherent in

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oil and gas exploration were inappropriate for a pro early 1950s, the CCF had formally abandoned the vincial government to take on, it nonetheless refused nationalization option, and by the mid-1950s, the the offer and, as a result, Imperial Oil halted explo oil polices of the CCF had largely converged with in in ration the province.22 those of the Social Credit government Alberta.

Despite the aggressive policies and positions of There seem to have been several reasons for the the CCF in its first term of government, debate over CCF's change in policy direction. First, the govern public or private development of resources contin ment was losing popularity through its first term. In ued within theCCF and, by its second term in office, the 1948 election, the CCF party went from 47 seats the party was backing away from its earlier direc to 31; one of the seats lost was that of Joe Phelps, tion of public ownership. Capital market forces and the of Natural Resources and an enthusi moderates within the CCF were moving Saskatch astic proponent of nationalization. The position of as ewan into the same passive rentier role Alberta Minister of Natural Resources went to J.H. (Johnson 2004).23 Following its formation in 1946, Brockelbank, whose ideology was less radical than the Economic Advisory and Planning Board (EAPB) his predecessor's.24 By this time too the failure of recommended in late 1947 and again in early 1948 the publicly owned firms established by the CCF that Saskatchewan rely on private development of government in 1945 and 1946, firms that competed the province's mineral resources (Johnson 2004, with existing private firms, had become apparent.25 123, 131). On 1 September 1948, all forfeiture pro Second, the CCF government faced a threat from ceedings under the 1944Mineral Taxation Act were oil companies in the province that they would move stopped, pending the resolution of court proceed out if the government went through with an agree ings surrounding the 's ment over the leasing of Crown reserves that the action to have the act declared ultra vires (Govern industry saw as putting the government in the oil ment of Saskatchewan 1950, 29). As a result of this, business (Johnson 2004; Richards and Pratt 1979, 26 the Saskatchewan Government passed an Order in 143). Financial necessity also encouraged the

Council allowing the return of forfeited mineral CCF government to converge toward Alberta's poli a cies on to resource rights upon payment of the mineral taxes, with and approaches development. deadline of 31 October 1950 for revestment appli American investors sent a clear message to Treasurer was cations. Revestment of the mineral rights Clarence Fines that Saskatchewan government completed by 31 December 1951, with 96.3 percent bonds would not be in demand if the CCF did not of the mineral rights restored to their original own improve the province's credit position (Richards and ers and the remainder retained by the Crown Pratt 1979). (Government of Saskatchewan 1952, 24). were moves Not only any toward nationalizing After the 1948 election, and following the Leduc Saskatchewan's oil resources limited to the CCF's and Redwater oil discoveries in Alberta, the CCF first term in government, it is uncertain whether the was sensitive to criticism about the relatively slow government's threat of expropriation was considered

pace of oil exploration in Saskatchewan. Aware that credible by investors, and if it was, whether the ex concessions would need to be made to bring the oil propriation risk had a lasting effect on the majors like Imperial Oil back to the province, Doug development of the province's oil resources. It is las was by this time sending letters to majors and often asserted, as by Richards and Pratt (1979), that independents indicating the province "has no inten the slower growth of the oil and gas sector was the tion of either expropriating or socializing the oil result of the threat of nationalization from the CCF. industry" (Richards and Pratt 1979, 135-36). By the This assertion rests on interpreting that slower

Canadian Public Policy -Analyse de politiques, vol. xxxiv, no. 4 2008 426 J.C. Herbert Emery and Ronald D. Kneebone

as development fallout from the CCF's rejection of cated that his most important objective was to take

Imperial Oil's offer in 1944. However, in a 1950 control of Alberta's resources so that resource roy memorandum to Premier Douglas detailing discus alties could finance his "province building" sions with Imperial Oil about the company's lack agenda.29 After 1971, it could no longer be claimed of activity in Saskatchewan and prospects for the that the government of Alberta remained in a pas company becoming more active in the province, sen sive rentier role. ior government officials reported that Imperial identified four reasons for not operating in Saskatch Lougheed's activist approach was criticized by ewan since 1945. In order, these were listed as: first, industry in Alberta as his government promoted they felt there was difficulty obtaining land; sec ownership in companies that competed with exist ond, there were "more interesting" geological ing private firms. Perhaps anticipating this criticism, structures inAlberta; third, there was a necessity to two days after he was elected, Lougheed declared: place all available funds inAlberta to protect the "We stand for enterprise?not . We discoveries that they had made; and fourth, they had stand for social reform and individual rights?not a fear of expropriation in Saskatchewan (Black big government control" (Bunner 2003). Lougheed 1950). Johnson (2004) argues that the relatively also took pains to emphasize in 1975 that Alan slower development of the oil and gas resources of Blakeney's NDP government's participation in the Saskatchewan in the 1940s and early 1950s would Saskatchewan economy made Lougheed's own

have also reflected the fact that the vast majority of government look "laissez-faire" in comparison proven reserves of conventional oil were inAlberta. (Bunner 2003). In practice, however, the Lougheed With Alberta's geological formations having proved government's actions were not radically different to hold commercial quantities of oil, with new oil from the resource-based public entrepreneurship services firms established inAlberta to service the ideas and policies of the Saskatchewan CCF before newly discovered fields, and with new pipelines 1950. Both Lougheed after 1971, and Premier being established to transport oil from field to of Saskatchewan after 1944, be market, it is not surprising that exploration in Sas lieved that resource rents could be used to aid the katchewan may have held less appeal for oil development of other industries to diversify their

companies.27 economies.

The sizes and wealth of the two provincial econo How the provincial governments have used their mies diverged dramatically with the Organization royalty wealth for economic development is also of the Exporting Countries (OPEC) in worth considering as itmay be important for under duced oil boom of the 1970s. This was also a time standing the differing fates of the provinces. The of dramatic change in Alberta politics, when the government of Alberta is perceived to have invested

newly elected Conservative government abandoned its resource wealth, whereas that of Saskatchewan the Social Credit Party's passive rentier approach has not. Richards and Pratt (1979, 273) argue that to resource development for a "public entrepreneur "to the extent Saskatchewan's resource rents are ship" approach that was similar to that of Douglas' used to augment public consumption and not as a early CCF governments in Saskatchewan. When he source of investment funds, the government may became in 1971, merely be retarding an inevitable process of con was able to enact significant changes to Alberta's traction of provincial population and infrastructure so a as royalty structure that Alberta could capture agricultural employment continues to decline."

greater share of resource rent.28 Further, he pro In contrast, Harding (1995) argues that in Saskatch moted public entrepreneurship in the oil and gas ewan resource revenues were used to finance sector. On election night in 1971, Lougheed indi investment and further resource development rather

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than social-policy initiatives. For example, between MacKinnon (2003) describes how she waited anx 1970 and 1980, Saskatchewan invested its resource iously in the early 1990s to hear whether the as rents in several Crown corporations such SaskOil government of Saskatchewan would be able to bor row and the Potash Corporation of Saskatchewan. from international capital markets. Like Fines, SaskOil was created to retain refining capacity in MacKinnon had to convince NDP supporters that it an was the province when private-sector oil refiners not feasible under those circumstances to pur nounced their intention to close down refining sue redistributive policies and levels of social capacity in Saskatchewan andManitoba, and expand spending to the extent that many NDP members refining capacity inAlberta. wanted. Finally, in a detailed examination of recent economic-policy choices, Emery and Kneebone Alberta's reputation for not consuming its pub (2003) conclude that differences in provincial tax lic revenues from oil and gas is also overstated. To and spending policies and differences in industrial the extent that resource royalties have been used to policy have been differences only in degree, and are reduce income taxes and allow Alberta to finance more reflective of differences in income distribu high levels of public spending without the need of a tion and industrial structure than profound provincial (Alberta is the only Canadian differences in political ideology. province without a sales tax), it would appear that the main role for resource rents inAlberta has also been to augment private and public consumption.30 Economic Evolution and Divergence Consider also that by 1983, Alberta was including investment income from the Heritage Fund in gen Did theCCF's policies retard economic development eral revenues and, after the collapse of the price of of Saskatchewan's oil resources and consequent eco oil in 1986, the provincial government stopped de nomic development? The preceding section makes positing oil and gas royalty income into the Heritage the case that the CCF experiment with public entre Fund and instead made these revenues part of gen preneurship was short-lived, and that by the early eral revenues. As a result of these decisions, the 1950s the oil polices of the CCF had largely con provincial government inAlberta had by 2004 saved verged with those of the Social Credit government less than ten percent of all natural resource revenue inAlberta. Any claim that differences in institutions collected since 1970.31 were responsible for differences in the economic

development of the two provinces therefore rests on In the 1980s and 1990s, economic circumstances an argument that differences in policies during this forced still further similarities in the economic poli short period of the late 1940s had substantial and pro cies of the two provincial governments. A crash in longed influences on future decisions by industry. In we oil prices in 1986 would force governments in both this section, seek to identify whether these short provinces to pursue deficit-reduction strategies that lived policy differences between the two provinces may were a remarkably similar. Kneebone and McKenzie have resulted in permanent change in the relative

(1999) show that Saskatchewan and Alberta reacted economic performances of the two provinces. to the fiscal crisis inways far more similar than dif ferent. Indeed, while Alberta is often considered the Figure 1 presents alternative measures of per champion of expenditure cuts and government with capita incomes in Saskatchewan relative to those in drawal from the economy in the face of the budget Alberta for the period of 1910 to 2004. From 1929 crisis, itwas Saskatchewan that instituted the larger to 1956, income ratios based on Green's ( 1971 ) gross cuts to program spending due to the province's high value added (GVA) estimates suggest a slight de debt level. Reminiscent of Clarence Fines' predica cline inAlberta's income advantage. Ratios based ment in his first term as on provincial treasurer, Janice average weekly incomes suggest no trend in

- Canadian Public Policy Analyse de politiques, vol. xxxiv, no. a 2008 428 J.C. Herbert Emery and Ronald D. Kneebone

Figure1 Saskatchewan's Per Capita Incomeas a Fractionof Alberta's, 1910-2004

1.05

1.00 >

0.95 l"/\"V_,

0.90

0.85

0.80

0.75 -Ratio of GDP - - -Adjusted GDP -? 0.70 Green GVA

-k? Adjusted GDP 0.65 -Weekly Income

0.60 o OOCMCOOTT CO CM CD O OO C\J ^-mmcococor^r^oo OO CD Cf> O) O) O) O) O O) O) O) S 8

Sources: See Green (1971) for calculations for 1910,1929 and 1956. Sources of data for the period 1961-2004 are as follows: Nominal GDP, 1961-1980: CANSIMV508957 and V508936. Nominal GDP, 1981-2004: CANSIMV687287 and V6877275. Weekly Incomes are from Series 57 and 58, "Averageweekly wages and salaries, industrialcomposite, by province, 1939 to 1975, (Leacy 1982). Adjusted GDP and GVA ratios account for the differences inmale and female employment and populations in the two provinces. Totalmale population: CANSIMv469504 and v469189. Total female population: V469505 and v469190. Male population, 15-64 years: V2466964 and v2466327. Female population, 15-64 years: V2467174 and v2466544. Male employment, 15 years and older: v2466999 and v2466399. Female employment, 15 years and older: v2467209 and v2466579. CANSIMpopulation and employmentdata are for the period 1976-2004. Observations for earlieryears were obtained by linearinterpolation between values for 1961 and 1971 taken from Leacy (1982).

relative incomes between 1939 and 1970. As one sessed oil, Saskatchewan incomes may have con would expect with integrated labour markets, it verged with Alberta's. would appear thatAlberta's expansion related to its early oil boom resulted in growth of the size of the Provincial gross domestic product (GDP) esti economy, but whatever productivity gains were driv mates from (beginning in 1961) ing increases in per capita incomes were also shared suggest that Saskatchewan enjoyed the benefits of by Saskatchewan.32 Given that Hanson (1958) esti a boom in potash prices during the mid-1960s, a mates that the Alberta oil boom had increased boom which was followed by a price collapse dur average incomes in the province by 20 percent by ing 1968-1972.33 The solid line in Figure 1 shows 1956, this would suggest that had Alberta not pos that by the end of that boom and bust cycle,

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Saskatchewan had again returned to its long-term katchewan, and . If Saskatchewan's public trend level of GDP; a level equal to roughly 75 per policies discouraged private investment, then we cent of Alberta's GDP. From 1972 , however, would expect to see low levels of private investment relative levels of real per capita income would be in Saskatchewan in comparison to levels in Ontario driven by energy-price cycles: Saskatchewan would and Alberta, two provinces governed by reputedly lose ground against Alberta during energy price more business-friendly provincial governments. booms (1974-1986, 1990-91, 1999-2004) only to catch up again during periods of low energy prices The figure shows that the level of per capita in (1987-1989 and 1992-96). vestment in Saskatchewan up to 1966 is comparable to that in the two other provinces, suggesting that The interpretation suggested by the data on per Douglas' socialism had not had an obvious nega capita GDP can be misleading, however, because per tive influence to that point. Investment in per capita re capita incomes of the two provinces may also terms fell precipitously after 1969 due in large part flect differences in demographics. Alberta has had to the collapse of potash prices. In addition, in the higher labour-force participation rates and lower early 1970s, private-sector oil refiners announced dependency ratios over time. To account for this that they would be removing operations from Sas influence, the dashed line in Figure 1 shows the ra katchewan and and expanding inAlberta tio of per capita GDPs adjusted for the labour-force in order to rationalize production. In Alberta, the participation and demographics (age and sex) of the impact of the 1973 and 1979 OPEC oil shocks show provincial populations.34 This measure shows no up in these data as an enormous investment boom trend to Alberta's advantage through either the that collapsed precipitously due to the combined 1950-1970 or the 1970-2001 periods. The gains effects of the 1980 (NEP) made by Alberta between 1971 and 1986 were off and the 1982 recession. It is interesting to note that, set by deteriorations in its relative position from other than during the early 1970s, Saskatchewan has 1986 to 1996. Adjusting per capita income to ac generated levels of per capita private investment count for Saskatchewan's higher dependency ratio comparable to those inOntario. yields the information that the relative productivity of labour employed in the two provinces has re An effective way of summarizing and compar mained more or less unchanged over the long run. ing the sources of economic growth in the two This would suggest that Saskatchewan's "socialist" provinces is to decompose annual rates of growth policies may have resulted in a higher dependency inGDP into three sources: growth due to additional ratio, but they have not in any obvious way under labour inputs, growth due to additional capital in mined the economy's productive capacity. This puts, and growth due to technical progress. Table 1 conclusion is also in line with Chambers and presents the results of these calculations for the pe Gordon's view that over the natural riod 1962-2004 ( 1966) long run, and for various sub-periods.36 resource an exports make economy larger and increase the income paid to the fixed factors of From 1962 to 2004, Alberta's real GDP grew at production, but they do not result in increases in per an average of 5.4 percent per year while Saskatch an capita incomes. If Saskatchewan's socialist policies ewan's grew at average of 3.4 percent per year. have had an effect on the , During this period, the amount of economic growth then it ismost likely to be apparent in the income ac accounted for by technical progress was essentially cruing to the owners of land and natural resources.35 the same in the two provinces. Output growth ac counted for by growth in capital inputs was Figure 2 presents a graph showing real per capita somewhat faster in Alberta (2.7 percent per year) levels of investment in Sas than private-sector Alberta, Saskatchewan (2.0 percent per year), but growth

Canadian Public Policy -Analyse de politiques, vol. xxxiv, no. 4 2008 430 J.C. Herbert Emery and Ronald D. Kneebone

Figure2 Per Capita Private Sector Investment,Saskatchewan, Alberta, and Ontario (1992 dollars)

T-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-1-i0 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002

Sources: Capital Expenditures,Total Private Investment, 1963-1990: CANSIMv50545, v50326, v49778. Capital Expenditures, Private, 1991-2004: CANSIMV759375, V759368, V759354. Population: CANSIMV469503, V469188, V468558. Consumer Price Index,all items, Canada:CANSIM V737344.

a due to expansion of labour inputs was substantially stock growth, Saskatchewan enjoyed the fruits of faster (1.7 percent per year versus 0.5 percent). The comparable level of technological progress. Since explanation for Alberta's more rapid economic 1986 the pattern has continued: Alberta's faster eco growth as being mainly the result of faster input nomic growth is solely due to faster growth in capital accumulation holds for each of the four sub-periods and labour inputs as each province has enjoyed simi shown in the table. The pre-OPEC oil-boom period lar rates of growth in productivity. of 1962-1970 saw Alberta enjoy a slightly faster rate is of output growth, but this advantage was due solely Growth due to technological improvements to more rapid input growth as neither province en similar in the two provinces before, during, and after rates differ substan joyed growth from technical progress. The energy-price booms. Growth more 1971-1985 period of high energy prices, when Al tially only when Alberta enjoys the benefits of berta enjoyed an investment boom associated with rapid input growth. Alberta's economic advantage on the expansion of energy production, generated rapid over Saskatchewan, then, depends that province's economic growth for that province, but again this ability to attract labour and capital. If Saskatch was mainly the product of very rapid input growth ewan's policies and/or political ideology rather than technical progress. While realizing sig discouraged capital and labour from locating in that we to see lower rates nificantly slower rates of labour force and capital province, then would expect

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Table 1 Accounting for Growth inAlberta and Saskatchewan

Real GDP Contributions to Growth - by: GrowthRate (%) LabourInput (%f CapitalInput (%)b TechnicalProgress (%)

Alberta

1962-20045.4 1.7 2.7 1.0 1962-19706.1 1.9 4.2 -0.1 1971-1985 7.9 2.1 3.1 2.7 1986-2004 3.0 1.2 1.8 0.1

Saskatchewan

1962-20043.4 0.5 2.0 0.9 1962-19704.9 0.7 4.3 -0.1 1971-1985 4.6 0.8 1.4 2.5 1986-2004 1.6 0.2 1.3 0.1

Notes: The calculations reported in the table assume an elasticity of output with respect to labourequal to 0.55, an estimate suggested by the Conference Board of Canada. The calculations are not significantly different ifwe instead assume labour'sshare of national income to be 0.67. ^Labourinput ismeasured by employment. bForeach province, capital input is calculated as 95 percent of the previous period's capital inputplus total expenditures on public plus private capital expenditures. The capital input ismeasured inmillions of 1992 dollars. The initialcapital stock for each province was obtained by attributing a share of the estimated capital stock for Canada in 1960 equal to the province's share of personal income in 1960. The estimate of the capital stock for Canada and estimates of personal incomes are from Leacy (1982). Sources: See Figure 1 for sources on employment. See Figure 2 for sources on capital expenditures and the price deflator.

were of input accumulation at all times. This is not what provinces essentially the same. What, then, ex we see inTable 1, particularly with respect to capi plains the dramatically different economic growth tal accumulation. From 1962 to 1970, Saskatchewan rates of the two provinces since that time? attracted capital at virtually the same rate as Alberta. oc The greatest difference in capital accumulation curs during 1971 to 1985, which can be directly Core versus Periphery attributed to the oil boom in Alberta triggered by the OPEC price shocks.37 We interpret the relationship between Alberta and Saskatchewan as having evolved into an economic We interpret the evidence presented in this sec core and an economic periphery. Krugman (1991, tion as showing that the short-lived policy 1998) describes the geographic concentration of differences between the two provinces were unlikely economic activity like manufacturing, and perhaps to have a as a resulted in permanent change in the rela services, the product of three-way interaction tive economic of the two performances provinces. between economies of scale in production, trans

By the early 1950s, the institutions of the two portation costs, and mobile factors of production.

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Due to scale economies in production, firms maxi 1944 and its short-term desires for nationalizing mize profits by spatially concentrating production. natural resources. It is also possible that the estab Transportation costs lead firms to prefer to locate lishment of the economic core in one region could near markets and suppliers. Market-size effects also reflect some small initial advantages of one region encourage geographic concentration of production over another; an issue we pursue below. since access to markets and suppliers is best where other firms have chosen to locate. Given these In 1910, Saskatchewan had the larger economy forces, economic development is a path-dependent and population. However, the evidence presented in process where growth begets growth. Table 2 also suggests thatAlberta had some impor tant advantages in initial endowments. First, Krugman provides an illustration of a case with Alberta's greater distance from Manitoba than that two regions, A and B, of equal size. The economies of Saskatchewan afforded Alberta producers greater are based on manufacturing and agriculture, and potential protection against the established manu starting from a point in time where transportation facturing sector inManitoba. Second, while smaller costs between the regions are high; as a conse in population, Alberta enjoyed a higher income per quence, manufacturing activity is equally distributed person. By 1929, the wealth of Alberta's endow across A and B. As transportation costs fall, manu ments compared to Saskatchewan's was clear. In facturing will migrate from one region to the other current dollars, the total incomes of the two resulting in one of the regions emerging into amanu provinces were equal, but adjusting for cost of living facturing core, and the other into an agricultural reveals that Alberta had the higher real income. periphery region. As part of this process, labour and Alberta's population remained less than Saskatch capital migrate from the periphery to the core re ewan's, with the result that per capita income was sulting in a larger population at the core, and higher one-third higher inAlberta. real wages than in the periphery. Which of the two regions will develop into the core is a priori am Table 3 shows that larger and manufac biguous. It could be the result of historical accidents, turing sectors explain Alberta's income advantage such as the election of the CCF in Saskatchewan in in this early period. Green's (1971) estimates of

Table2 Gross Value Added, Current and Constant Dollars

Price Index GVA (inmillions of dollars) PerCapita GVA ($) (Toronto 1913=100) Current Constant Population Current Constant

1910 Saskatchewan 113.1 121.4 107.3 487,100 249 220 Alberta 104.0 98.7 94.9 369,200 267 257 1929 Saskatchewan 156.8 415.0 264.7 921,900 450 287 Alberta 146.4 411.0 280.7 731,600 562 384

Sources: Green (1971); population numbers from Table A-1; GVAestimates from Tables B-2 and B-3. Inter-temporal inter-urbanprice indexvalues are from Emery and Levitt (2002), using Regina's price index for Saskatchewan and Calgary's for Alberta.

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Table3 Gross Value Added (inmillions of dollars) by Selected Sectors

CurrentDollar GVA Total Mining Manufacturing Agriculture $ $ $

1910 Saskatchewan 121.4 0.3 3.0 74.9 Alberta 98.7 7.4 7.2 34.0 1929 Saskatchewan 415.0 2.0 18.0 157.0 Alberta 411.0 31.0 34.0 120.0

Percentage Distribution Mining Manufacturing Agriculture % %

1910 Saskatchewan 0.2 2.5 61.7 Alberta 7.5 7.3 34.4 1929 Saskatchewan 0.5 4.3 37.8 Alberta 7.5 8.3 29.2

Source: Green (1971).

GVA by sector show that in 1910, the gap in total Saskatchewan was in large part due to oil having GVA between the two provinces was due to the gap been discovered first in Alberta where there were in incomes generated in agriculture. Alberta made proven to exist appropriate geological structures. It a up portion of the agricultural gap through larger thus made economic sense to exploit those possi mining and manufacturing sectors. Across all re bilities first. As stressed by Mansell (1987), the oil maining sectors, the two provinces generated equal and gas industry is characterized by high capital incomes. By 1929, Alberta's advantage and impor intensity, specialized technology, strong forward and tance was of manufacturing substantial, and large backward linkages, and hence large inter-industry enough to offset the higher income from agricul multiplier effects. These industries demand massive ture generated in Saskatchewan. amounts of capital, a highly skilled workforce, and

supply large revenues to government that in turn These observations reveal an important but over enables the provision of social infrastructure with looked aspect of the economic development of the out a high tax burden. The development of oil and two provinces: Alberta's advantages inmining and gas, and the industrial linkages developed as a re were outset. manufacturing present from the The fact sult, were crucial because non-oil and -gas industries that large pools of oil and gas would be found in would necessarily remain small in both provinces Alberta prior to their being discovered in Saskatch due to the geographic isolation of Alberta and Sas ewan meant that this initial advantage would prove katchewan from large population centres. Alberta's memo decisive. As Imperial Oil noted in its 1950 initial lead inmanufacturing, and the good fortune randum to Premier Douglas, the lack of activity in of having large pools of oil and gas found there first,

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were critical determinants inAlberta's subsequent velop to the extent that the value of manufacturing development as the economic core of the western output is three times the value of the province's ag Canadian region. ricultural production; whereas in Saskatchewan, the value of manufacturing output remains below the By the 1950s, the evidence of the core-periphery value of agricultural production. relationship was becoming clear. Saskatchewan had a larger population than Alberta as late as 1941. From 1947 to 1970, Alberta and Saskatchewan However, from 1951 to 1971, while Saskatchewan's were both outposts for American and British corpo population grew from 900,000 to 950,000, Alber rations. In the 1970s, that changed as domestic ta's grew from 900,000 to 1.6 million. From 1971 control of the "oil patch" and potash production took to 2003, Saskatchewan would realize a gain in place. Alberta became home tomany large corpora population of only 50,000 people while Alberta's tions while Saskatchewan created Crown corpora population would increase by 1.4million. Most im tions like Potash Corp. and Saskoil. Of the 800 portantly, in terms of enabling the realization of largest (ranked by revenue) corporations in Canada agglomeration economies and further industrial de in 2002,205 of the largest 800 corporations had their velopment, almost all of Alberta's population growth headquarters in one of the four western provinces: occurred in urban centres. As early as 1951, each of with 90 located inAlberta, 76 in , the two largest in Alberta ( and 15 in Saskatchewan and 24 inManitoba (National Calgary) was larger in population than the combined Post Business 2003).38 Alberta's large corporations populations of the two largest cities in Saskatchewan are dominated by the oil and gas sectors with En (Regina and ) and this would remain so ergy (28), Utilities (10), and Oil Field Service (10) thereafter. accounting for over half of Alberta's large corpora tions. Saskatchewan has very few large corporations Today, the economies of Alberta and Saskatch and, amongst the five largest that it has, two are ewan have very different structures. Both provinces potash-fertilizer producers, one of which was a have export-to-GDP ratios of 36 percent, and 80 Crown corporation until it was privatized by the percent of exports are commodities (Roach and Conservative government of in the Berdahl 2001). Saskatchewan's exports are domi 1980s (McLean 1999; MacKinnon 2003). The larg nated by , potash, and oil, while 67 percent of est corporation in Saskatchewan is Federated Alberta's exports are from oil, natural gas, and coal. Ltd., and the third largest is the Sas While Saskatchewan's agricultural production is katchewan Wheat Pool.39 dominated by wheat and other grains, Alberta's ag ricultural production is dominated by cattle production. Saskatchewan is the largest producer of Conclusion potash in the world. While both Saskatchewan and Alberta produce oil and natural gas, the greater im In 1905, the Canadian federal government set the portance of energy resources for Alberta is clear: stage for an interesting natural experiment. The Alberta is the ninth largest producer of oil in the government established the provinces of Saskatch world and the third largest natural gas producer. ewan and Alberta by drawing a border that divided Within Canada, Alberta produces 55 percent of a prairie region into two halves approximately equal Canada's conventional crude oil, and all of Cana in area, population, and economy. Throughout their two da's oil-sand production. Saskatchewan is Canada's histories, the provinces have consistently elected second largest producer of oil in Canada, produc governments of seemingly very different political ing 20 percent of Canada's conventional crude oil. persuasions; right-of-center in Alberta and left-of Alberta has also seen its manufacturing sector de center in Saskatchewan. From equal beginnings, the

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5The 1916Census of Prairie Provinces 1906 political boundary has come to define two very dif reports ferent economies. What role has the difference in populations of 257,763 for Saskatchewan and 185,412 for Alberta. See Canada (1918, xiii). political regimes made possible by the border played in the outcomes of the two 6 determining divergent Supporters of a single, large province included economies? Frederick Haultain, the first premier of the Northwest Territories, who campaigned for the creation of a single

We have found thatwhile the rhetoric of the lead province between Manitoba and British Columbia. The one was ers of the two provinces may have differed, in logic behind the establishment of only province that as a had practice there has been little difference in the poli single government administered, effectively, the entire area of the Northwest Territories from 1897 to cies pursued. As one would expect in small open 1905, there was no reason that the territory could not con economies with integrated factor markets, financial tinue to be efficiently managed without division. In constraints and market forces limit the ability of Haultain's opinion, proposals to divide the territories into socialist governments to be public entrepreneurs. more than one province reflected nothing more than am While the perception exists that Saskatchewan so bition of certain cities to be provincial capitals and the cialism caused Alberta's eventual dominant helped establishment of two provinces would "simply double the Saskatchewan's fate is position, ultimately, really government, double the legislature, and double every ex one of natural economic evolution in the presence pense as it would be necessary to double all the econo of falling transport costs and agglomeration institutions which we need at the present time ...."

mies. Alberta's early lead in manufacturing (Owram 1979, 185). were development, and mineral endowments, the 7 , a Liberal Member of Parliament and seeds of its economic leadership. at one time the Minister of the Interior, believed that the

western and eastern portions of the territory were char acterized by different industrial conditions. Hence the Notes territory would be best served by two local governments 1 and two legislatures (Owram 1979, 316). Ranching in Our study follows a similar strategy to McLean and terests in the southwest portion of the territories expressed Taylor's (2001) comparison of the economic development concern that legislation that benefited the eastern and of Australia and over 150 years. parts of the territories where the growing of ce 2 Itwas known at that time that Alberta contained large real crops was the dominant activity would be harmful to tracts of . However, it would not be until the cattle and horse ranchers in the southwest. Thus, these

1980s that producing bitumen from the oil sands would interests sought the complete severance of the stock coun become economically viable (Chastko 2004). try in the southwest and the mixed farming country of from the areas of south 3 grain-farming Marchildon (2005, 4) describes these as stereotypes eastern Alberta and Saskatchewan. crude and potentially misleading representations of pro 8 vincial character but "widely held by many inside and In 1905, a Member of Parliament from ex outside the region." pressed the fear that one province extending from the Manitoba border in the east to the Mountains in 4 Rocky MacKinnon (2003, 19) suggests that many business the west would "soon become overgrown and devour its people and right-of-centre politicians feel that the social creator" (Lingard 1946, 202). In this sense, the creation ists in Regina rather than oil in Alberta have had more to of two smaller political entities was reminiscent of Brit do with Saskatchewan's perceived under-performance. ish colonial policy after the American Revolution that MacKinnon cites , former Saskatchewan maintained the view that small, separate colonies would MLA: "The CCF-NDP has been a curse on the province show less independence than large ones. Nicholson (1954, of Saskatchewan and have unquestionably retarded our 20) provides the quote about the creation of the Loyalist economic for which our will development, grandchildren ... colonies: "The object was to govern by means of divi pay." sion, to break them down as much as possible into petty,

Canadian Public Policy -Analyse de politiques, vol. xxxiv, no. 42008 4 36 J.C. Herbert Emery and Ronald D. Knee bo ne

isolated communities, incapable of combination, and pos In 1947, only 83,000 cubic metres of oil were produced sessing no sufficient strength for individual resistance to in Saskatchewan (Canadian Association of Petroleum the Empire." Producers 2008). Prior to 1930, Alberta mined substan tial of coal. Coal 9 quantities production dominates the The veracity of this argument apparently had a short value of mining reported in Table 3. See Boothe and shelf life. The subsequent extension of the provinces of Edwards (2003) for a discussion of the importanceof coal Quebec andOntario in 1912 to include areas of 1,545,788 production for the province. and 1,072,713 square kilometres respectively made each 13 considerably larger in area than the two new provinces. It is also important to remember that in the 1950s, 10 when development of oil deposits in western Canada be The drop in farm incomes was large in both gan in earnest, private oil and gas companies were far provinces but greater in Saskatchewan relative to 1926 more hostile to government involvement in the industry values. This could reflect the extreme reliance on wheat than has been the case since the 1970s. Doern and Toner production in the Saskatchewan economy as highlighted (1984) relate how in 1954 the project to construct the by Marchildon (2005), and it could reflect that the drought TransCanada pipeline ran into financial difficulty. The during the 1930s was more severe in Saskatchewan than federal government agreed to provide financial support in Alberta, particularly in the south of the province in the that could have given it equity ownership in the company. Palliser's triangle region (see Kerr and Holdsworth 1990, Gulf Corporation, whose Canadian subsidiary was to sup plate 43). ply 40 percent of the gas toTransCanada, had established 11 a of to sell to a controlled, Political histories of the two provinces often sug policy refusing gas company or controlled, gest that reactions to the Great Depression reflected the potentially by government. Consequently, the to to TransCanada was threat biases and principles of the immigrants who settled the agreement supply gas ened with cancellation. Rather than Gulf, the rural areas of the two provinces (Lipset 1968; Richards challenge and Pratt 1979;Wiseman 1991; Gibbins 2001). In Sas federal government provided financial aid to TransCanada a Crown to finance the most ex katchewan, relatively large numbers of eastern European by creating corporation and British Fabians settled in rural areas and their social pensive part of the project.

ist sympathies would embed a provincial political culture 14 The failure of the Canadian financial sector, con that provided support for an interventionist provincial centrated in , to finance local firms in the government. In Alberta, fundamentalist Christians, On hunt for oil and gas, reinforced the sense that the Cana tario Tories and were said to have determined dian financial sector and Canadian institutions were the political culture of the province; these immigrant failing Alberta. groups stressed to a greater degree than those in Saskatch 15 ewan the role of the individual over the state. Thus, in Similar statements are still being made today in the

Saskatchewan the Depression was interpreted as show face of political uncertainty in the Middle East, Nigeria, ing that outside forces?both economic (the collapse of Venezuela, and elsewhere. world trade and and natural grain prices) (drought)?were 16 In 1938, the CCF ran second in terms of popular largely responsible for individual circumstances and this vote and won ten seats candidates in was despite fielding only reinforced the judgement that a collective approach 30 of 52 In the 1944 the CCF would a ex ridings. election, required to answer them. In Alberta, while similar sweep to power winning 50 of 55 seats. perience was had, the interpretation was different; the of the was the failure of economic 17 problem Depression See pages 1 and 2 of the "Regina Manifesto" re financial The em institutions, in particular the system. printed inZakuta (1964, 160-69) and Richards and Pratt on individual inAlberta that phasis responsibility required (1979,101). The Depression had instilled in theCCF lead the be a failure of institutions, Depression explained by ers the idea that capitalism had failed. Production was not the need for collective action. for profit and not for human need, and these two objec 12 tives could not be reconciled. Further, the CCF leaders In 1947, one million cubic metres of oil were pro to believed that private corporations refused to produce duced in Alberta, mainly from the Turner Valley area. This meet public need unless the returns were unreasonably was less than six percent of the amount produced in 1955. high. The CCF's solution to this was a new economic

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order, a that placed three key indus practical cabinet ministers like Douglas, Fines and J.H. tries under public ownership or direction. These industries Brockelbank. were the and finance other indus banking corporations; 25 In the two years following its election in 1944, the tries and services essential to ; and the CCF government established a brick-manufacturing plant, natural-resources industry, the profits of which should go a shoe factory, a tannery, a fish-processing and market back to the people (Johnson 2004, 29). ing board, a timber board, a fur-marketing service, a box 18 According to Johnson (2004, 43-44), the CCF's factory, a provincial bus company, and a sodium sulphate Natural Resources and Industrial Development Commit mine (Richards and Pratt 1979, 112). tee advocated that the of resources should development 26 In March 1954, the Saskatchewan government en take place under public instead of private control. tered into a "farm-out" (an arrangement whereby the 19 Douglas argued that already had experi owner of a lease assigns some portion, or all, of the lease enced social ownership in the form of the national railway, to another company for drilling) agreement with Co provincial telephone, and electrical services, etc. (Johnson operative Refineries Limited, creating a loud outcry in 2004,30-31). the oil industry. The government was warned that private oil could withdraw from the unless reassured 20 province Joe Phelps, the Minister of Natural Resources, be that the agreement did not establish a precedent for gov gan plans for the development of government-owned ernment investment in production and development. The factories, including a pulp mill, a woollen mill, a brick CCF government retreated, and the agreement was yard, a show factory and a tannery (Johnson 2004, 68). changed into a royalty agreement that removed the of 21 fensive venture features and Pratt Approximately ten percent of Saskatchewan's min joint (Richards 1979, 185). eral rights were owned by private firms or individuals. The stated reason for the Mineral Taxation Act was to 27 In a similar vein, Hanson (1958) describes how the "compensate the people of the province for the depletion development of the Redwater oil discovery in Alberta of these alienated minerals" (Government of Saskatch drew resources away from the further development of the ewan 1948,37). Leduc oil field. This in part reflected the shortage of 22 for in the late 1940s and 1950s. However, several independents, including Husky Oil, equipment drilling early Thus it is no means continued to invest (Richards and Pratt 1979, 134). by surprising that drilling and other resources not to would go Saskatchewan until the bigger 23The moderation of theCCF inCanada from 1933 to fields in Alberta were further developed. Hanson (1958, the 1950s had been described as the of a "becalming pro 99) furtherdescribes how drilling inAlberta slowed down test movement" (Zakuta 1964; Whitehorn 1992). The after 1951 as exploration and development efforts moved official stand on the role of social ver party's ownership into Saskatchewan where some successes had been oc sus moved from a of private enterprise prohibition curring. capitalism in 1933 to the aiding and encouraging of pri 28 Soon after the election of his Conservative vate business to fulfill its legitimate function in 1948. The govern ment, set to work to increase the rate distinction between the CCF and the "old parties" dimin Lougheed royalty in the of the Social Credit ished further through the 1950s (Zakuta 1964, 74, 87-88). place during 36-year reign party. Effort was made to maintain the of the 24 sanctity original It is also the case that CCF "moderates" did not have contract agreed to by the Social Credit government of enthusiasm for these early attempts at in nationalizing 1949 by changing the maximum royalty rate only on re resource dustry and development. Richards and Pratt reserves. maining oil This had the effect of raising the (1979) and Johnson (2004, 92) attribute these ambitious royalty rate from 16.67 percent to 23 percent of gross directions as driven Joe the policy primarily by Phelps, production. Minister of Natural Resources in the CCF's first term of 29 Government from 1944-1948. Johnson (2004, 62) de Lougheed's Conservative government promoted the as of of oil and into scribes Phelps "fanatically loyal to the CCF platform development forward-processing gas and after 1975 it saved 30 of and ideology," and he stood in contrast to principled yet petrochemicals, percent oil revenues in government the Alberta Heritage Savings

Canadian Public Policy -Analyse de politiques, vol. xxxiv, no. 4 2008 438 J.C. Herbert Emery and Ronald D. Kneebone

and Trust Fund. Lougheed's governments created and term negative effect on the development of Saskatche owned significant shares of the Alberta Energy Corpora wan's oil and gas resources. AGTL and to the creation of tion, encourage 36 The use of this methodology requires an assump local capital and to aid the development of oil and gas tion thatoutput is determined by the application of labour entrepreneurial talent in Alberta. In 1974, Lougheed's a and capital to production process affected by a certain government also acquired controlling interest in Pacific level of technology. The production process is assumed Western Airlines and moved its headquarters to Alberta to exhibit the property of constant returns to scale and it amid rumours that the government in neighbouring Brit is assumed that the sensitivity of output to input growth ish Columbia planned to take the airline over. In 1973, rates is constant over time. Those assumptions are re the government announced that it would acquire 20 per in the notes to the table. In this cent of the Saskatchewan-based Inter-Provincial Steel ported approach, growth due to technical progress is measured as a residual. Company (IPSCO), a producer of steel pipe used for oil and 37 gas pipelines. With projections that Alberta's endowment of con 30 ventional crude oil and natural would be Alberta would seem to fit Ross's (2001, 327-28) gas depleted by 50 percent between 1970 and 2000, it is interesting to characterization of governance in resource-rich econo speculate that Alberta may only have 30 years or less to mies. Governments use low tax rates and generous live off of its energy resources and so continue its advan spending to relieve pressures for political accountability. tage over Saskatchewan (Conference Board of Canada 31 Sources: Alberta Budget (various years) and Alberta 2003). Trust Fund 2003-04 Annual Heritage Savings Report. 38 The 100 largest corporations had revenues from 32 See Chambers and Gordon (1966) for a discussion $2.76 billion to $37 billion in 2002; the 101st to 200th

of the growth impacts of primary products for export. See largest had revenues between $1.2 billion and $2.76 bil Coe and Emery (2004) for evidence of integration of pro lion; and the 201st to 800th ranked corporations had vincial labour markets before 1950 and after 1970. revenues between $0,269 billion and $1.2 billion. InBC, 12 head and Services nine 33 (with offices) (with The price collapse was due to the combined effects head offices) are the dominant sectors for head offices. of a world demand for potash and the disinte declining InManitoba, Farm (with six head offices) is the largest gration of the potash cartel that had maintained high single sector. potash prices with prorationed production across mem 39 bers. Saskatchewan's government was named as a Saskatchewan also lacks large subsidiaries with no co-defendant in antitrust action in the US (Richards and entries in the Top 100 Subsidiaries in theNational Post Pratt 1979). FP500 rankings, while Alberta has eight entries, British Columbia and Manitoba four. 34 five, Following MacLean's (1993) work on California in the 19th century, the per capita GDP of each province is multiplied by the following term: References

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