Newfoundland and Labrador in Transition: From Commission of Government to the Present and Beyond: Paper 2
Doug May, Patti Powers, Alton Hollett, and Wade Locke.
Prologue
To understand the challenges that we as a Province face today, one has to understand how we arrived here. The story, as we understand it, has an arbitrary beginning but is ongoing and therefore there is no conclusion. Moreover, as just noted, this is our understanding but we would no doubt benefit from others’ perspectives. There was the inclination to focus on the “economy” in transition and how it has changed and evolved over the years, but this approach ignores the other parts of our make-up, that is the culture, the geography, the politics and the social relationships and networks that combine and interact to influence the outcomes we describe. To understand the Newfoundland economy transition story, you have to understand the parts and then integrate them into the whole story. Omitting one part or meeting the challenge of one component will fail in the sense that it ignores the impacts on the other parts which are interdependent and important. The insight of economic thought is one of understanding trade-offs and balance amongst alternative choices in the face of constraints.
The basic story then involves one around the Province “transitioning” while facing and, in response to various social, geographic and economic challenges.
In the Beginning
At the beginning of our story around 1932, for much of the population, the economy was substantially a non-cash, subsistence one focused on the salt-fish (cod) trade with Europe and the Caribbean. The fishery at that time was still tied to the British East Coast Country fishery which had existed over the centuries and which had evolved only to the extent that harvesters dealt directly with local merchants who were intermediaries with those on Britain. While we can write about “fishers”, a more accurate description would be the labour provided by fishing families with all hands, including children, on deck since all were involved in harvesting and processing. Families were often very large and therefore children were an important source of labour. More generally, these families were involved in “home production”, that is, any productive activity which kept the family, the extended family or neighbours capable of surviving. General hard work was required for such survival. These self-employed harvesters dealt with local merchants on the “truck” system in which processed salt fish was traded mostly for the manufactured necessities needed for fishing and living; these items might include sails, rope, utensils, clothes, sugar, teas and flour.
1 Given the truck system, the access to cash by fishing families was very limited. Any cash which could be had was likely to be used for church christenings, weddings and funerals. For some of the more successful family enterprises, cash could also be used to order goods from a catalogue or buy consumer goods that were not available in the settlement from the local merchant when visiting a larger community.
For the most part, the fishery was inshore and accessible by small boats. This access to the fishery resource coupled with the use of wood to heat the homes, build the wharves, and dry the fish resulted in the settlement of smaller communities located in the bays along the island’s vast shoreline. Given the relative isolation, members of these settlements were often comprised of a small number of extended families. Social bonds were strong and helped to ensure survival under harsh and often varying conditions.
Given the nature of the fishery, Newfoundland society, and that of coastal Labrador, was primarily made up of hundreds of small isolated communities (some 1325 in Newfoundland in 1949) called “outports”, mostly only accessible by water. These communities were dispersed over a very wide geographic region, along some 6,000 miles of coastline on the island.
Churches played an important role in meeting the spiritual needs of the communities as well as their social life. The church also was involved in education and often in hospital care in the larger communities. Most of the European settlers were from southern Ireland, southern England or France. By this period, the indigenous population was Mi’kmaq, Innu or Inuit. As might be expected from a population dispersed over such a wide geographic, a portion of the population was of mixed ancestry.
While the discussion thus far has concentrated on the Newfoundland fishery, the European Labrador fishery had existed before the European Newfoundland fishery starting around the 1540’s with Basque and Breton whalers and fishermen. The rich fisheries in the Labrador waters resulted in fierce and protracted competition amongst many groups. By the 1930’s the Labrador fishery was made up of two groups, those fishing families who lived on land (stationers) and those who came seasonally to Labrador on schooners (floaters). The latter group were based in island communities such as Harbour Grace or Brigus.
A characteristic of the fisheries as with other staples, that is, natural resource products intended for export to wealthier and more industrialized economies, was that the value of the exports could vary greatly due to variations in the price of the export or the quantity of the commodity to be exported. Boom/bust cycles were a central characteristic of the export of such commodities and affected fishing families directly but transmitted the economic waves to the general economy. The early 1930’s was a “bust” period for the cod fishery and thus for Newfoundland’s economy. The fisheries’ failure was a major factor in bringing the Dominion to the point of bankruptcy. This cyclical pattern in the value staples exports continues to be a feature in our province’s and national economy today.
2 The cyclical nature of the fisheries economy was sometimes caused by too many fishers catching too much fish causing stocks to decline. The reality of economic uncertainty and an excess supply of labour provided a good motivation to look for other means of a livelihood. While for some families, this circumstance would imply emigration generally to Canada or to the New England states for others it meant searching for alternative employment within the Dominion. The construction of the railway in the latter part of the 19th century provided such alternatives. Jobs such as operating and maintaining the railway as well as building branch lines well into the 1930’s and beyond became available.
The railway, which was built across the island along with its numerous branch lines, opened up the island’s interior. In doing so, the island’s other natural resources could be developed. For example, an abundance of forests provided wood for timber and logs for pulp to feed newsprint operations at Grand Falls and Corner Brook. These were model towns with relatively good- paying cash jobs. Similar observations could be made with respect to mining towns such as Buchans, Wabana and Baie Verte.
Newfoundland’s and Labrador’s comparative economic advantage rested in its abundance of natural resources. The development of these natural resources and their export to foreign markets was the pattern for the history of the economic development of the Dominion. Most of the manufacturing industries as well as many service industries that existed at this time were tertiary to these natural resource industries.
The other interesting characteristic of these natural resource industries related to the primary inputs of capital and labour services. The labour services were primarily provided by local residents with perhaps senior managers coming from outside the country. The financial capital for these operations came from outside developers. In reality, economic theory has identified three primary inputs associated with natural resource exploitation. The third input is the resource itself and its associated income are the “rents” that the resource can secure. While labour collected its labour income, the owners of capital collected not only the capital income but, as normally the case, also the resource rents. This same pattern existed very early on in the fisheries but then changed early on in the 19th century. As the inshore fishery developed, the small amount of fixed assets such as the boat and fishing equipment were supplied by the fishing families. Local merchants managed to secure some of the resource rents although much of the value-added associated with the export to markets rested in the transportation and distribution of the salt-cod in the final European markets. The result was that there were some very rich families associated with the fisheries in London and Poole.
The same patterns of economic resource production and export exist to this day. The labour inputs are generally supplied locally while outside capital is used to start development and finance the operation. Resource rents often accrue to the “foreign” owners of the capital. Public support for development is generally related to the number of jobs that can be generated. The expectation of jobs offered by developers becomes a major selling feature to the public and governments. There are some interesting exceptions to this general observation but this would require a more detailed discussion than this paper covers.
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The island’s urban centre and capital was, and is, St. John’s although there were other principal centres such as Carbonear, Grand Falls, Windsor, Botwood, Bishop Falls, Harbour Grace and Corner Brook that were relatively large in comparison to the smaller outports. In 1949, twenty- five communities had populations of 1,000 or more. In the various communities, merchants, if present, were at the top of the social ladder followed by clergy, doctors and civil servants, such as judges.
In 1932, Newfoundland was one of six Dominions in the British Empire which had a British appointed Governor and 27 members elected to the House of Assembly. The country therefore had responsible government and was generally self-governing. The presence of the government in the smaller communities was relatively unknown. Still, at the beginning of our story, the Dominion government had faced bankruptcy but had been bailed out by the British Government and the Canadian Government. The cost to the people of Newfoundland of this bailout by the British was the loss of “responsible government”. This potential bankruptcy had occurred because of a fall in revenue brought on, as was noted earlier, by the collapse of fish prices in the Great Depression coupled with government debt accumulated over a long period of time. The accumulation of debt was largely attributed to the war effort of World War I as well as to building and running of that large infrastructure economic development project called, the Newfoundland Railway.
Responsible government had been replaced by a Commission of Government of the United Kingdom in 1934. The Commission was made up of 7 individuals, all of whom were appointed by the Crown and included a British Governor, 3 British officials and 3 Newfoundland-born appointees. It was expected that this would be a short-term situation and responsible government would return once the government was self-supporting. It should be noted that Newfoundland was still a territory of the British Empire and therefore a “dominion”, but no longer one of the other five self-governing Dominions.
The Depression continued with a second major downturn occurring around 1937. The political situation began to change rapidly in Europe and Asia as events leading up to the Second World War began to occur. The strategic importance of Newfoundland as a forward base between Europe and North America had not been lost on British, Canadian or American military strategists especially with the growing importance of air power. In 1938, the British established its first airbase in Newfoundland. While the Canadians followed suit, it was the American military presence (often referred to and “the American, or Friendly, Invasion”) that had a very significant impact on the economy and culture of the dominion of Newfoundland.
Fort Pepperrell (more recently known as Pleasantville) in St. John’s was the command centre for the U.S. forces in the Dominion. However, the American presence was felt throughout Newfoundland and Labrador in Gander, Argentia, Stephenville, Goose Bay and elsewhere. Not only did the servicemen mix with the local population but the American cultural and standard of living began to have an impact. Many Newfoundlanders and Labradorians earned good “cash” incomes working for the Americans, primarily in construction jobs. For example, in 1935
4 there were about 3,000 construction workers in the dominion. By 1942, this number had increased to around 20,000. The transition for mainly men from fishing to construction work was relatively easy since survival in isolated outports required that workers were a jack-of-all- trades. “Good” workers were skilled at performing all sorts of tasks such as farming, fishing, boat building, general carpentry, and logging. . The result of this occupational transition was that Newfoundlanders began to experience higher wages and the improved living standards they could provide. As a result, Newfoundlanders became accustomed to American and other external customs and living standards
The number of construction workers peaked in 1943 and with the decline in the number of construction jobs, the workers returned to the fisheries with its lower standards of living and a harder way of life. By 1949, there we almost 6,500 workers in construction. This number was well below the peak but more than double the number that existed before the war. The construction industry had established itself not only as an important contributor to the Newfoundland economy but as an important source of cash income for workers wanting to leave the fishery.
When the war ended the Americans and Canadians began to withdraw from Newfoundland. Britain, at the end of the war, found itself financially struggling. Rationing in Britain, for example, continued until around 1954. The famous British economist, Lord Maynard Keynes, advised his Government that it should not continue to be responsible for the finances of the dominion.
In addition, as David Alexander pointed out in his book, “Decay of Trade”, the War and the pound sterling collapse of 1948 had doomed the traditional salt fish trade. New markets closer to home had to be found but the Americans had a taste for frozen processed cod which came from Iceland. That country had adopted freezer technology earlier in the 1900s, and produced a “fresher” product rather than our traditional salt cod. Newfoundland found itself technologically behind.
The developments outlined in the two proceeding paragraphs implied that many workers and their families had earned good wages. They had enjoyed a higher standard of living but would now be forced back into a declining industry with its traditional hard life and once again, a lower standard of living. Unlike much traditional economic theory which assumes costless adjustments, the cold reality is that adjustment to some new economic state, then and today, often involves high economic, social and psychological costs. Trying to avoid these costs may explain some short-term behaviour. Such costs are unfortunately, often inevitable.
In short, with the decay of trade and the winding down of the war effort, the economy of the dominion was on a downward economic slope and many families were on “welfare”. In early 1949, the dominion had a cash surplus on its books presumably because of the impact of military spending by the British, Canadian and American governments. It also had a large debt, that was only slightly lower than it had been in 1932.
5 The description for this period would not be complete if we did not mention the “baby boomers”. The increase in fertility rates came shortly after the war when military personnel returned to their homes. The period generally ended in the mid-1960’s. It was an international phenomenon. For Newfoundland, we would arbitrarily put the starting date around 1946 when Newfoundlanders in the military returned home and ended around 1970, which is later than other places and may be influenced by a large traditional Roman catholic population.
Facing the Challenges
The challenges which faced any Newfoundland government were daunting. The non- Newfoundland military forces were leaving the dominion but so was their spending power. The fisheries, which was the primary source of employment, was in trouble due to reliance on products for markets that were destroyed by war. New products had to be produced for new markets as well as a need to adapt to a changing technology. In any event, the low “incomes” that the fishery provided to families could be expected to fall. While a portion of the population had experienced higher wages, the reality was that the standard of living for most families was very low by North American standards. As one outport mother expressed it, “You could tell who was well off ‘cause they had three meals a day.” . Thanks to a wide-spread exposure to CFA’s (“come-from-aways”), a taste had been developed in the population for North American consumer goods and services. Very low incomes coupled with new found consumer tastes, informed a population of just how relatively poor they were. The questions to be tackled by any government would result in answers and solutions that would rattle the economic and social status quo or equilibrium.
• How could government assist a declining fisheries industry to modernize? What new products had to be produced for these new markets?
• How might good paying and attractive jobs with sufficient income be provided to households so that they might afford those goods and services consistent with a current North American standard of living?
• How could government finance the dominion and yet abandon the tariffs which are the main source of finance for the government? It should be remembered that while the Commission of Government had accumulated surpluses thanks to military presence, it still had a large debt. More importantly, its revenues were in decline and its expenses in ascendancy.
• How could government provide essential services to the far-flung rural communities where, in many cases, teachers did not exist but tuberculosis and poverty did?
It was not only with respect to private goods and services that Newfoundlanders had found themselves wanting; it was also with respect to public goods and services. Canadians enjoyed
6 larger government transfers in the form of old age pensions that began at the age of 65 rather than 70 and families received the “baby bonus”. In most outports, doctors or even nurses were relatively unknown but there existed a relatively complete knowledge of local remedies. The causes of illnesses often went unknown. Still, most of us in the older generation have no difficulty in naming someone who spent time in the sanitorium with tuberculosis.
Relatively few people had completed high school and far fewer had university degrees but then again, the informal training that workers did receive was appropriate to the tasks at hand. Those who did have degrees often came from, what many would think of as, “elite” families. The challenge remained of how could government provide reasonable levels of essential services to families living in these hundreds of far-flung outport communities.
The loss of responsible government and the imposition of direct government by the United Kingdom must have been a humiliation for many of the country’s leaders. The return of the dominion to being “self-supporting” would prove difficult given the slowing economy and falling government revenues coupled with a growing post-war population with new expectations and public service demands. The alternatives were to remain with Britain which incidentally could not afford its former colony. Larry Klein, a Nobel Laureate, recommended to President Truman that the United States not seek to have Newfoundland join. It is likely that the United States would have wanted to avoid annexation since it would no doubt annoy two of its closest allies, Canada and Britain. The third alternative in 1948 then was Canada. Referendums were then held to consider the above alternatives. The first referendum failed to select an alternative accepted by more than 50% of the voting population although responsible government was, by a narrow margin, the most popular alternative. Accordingly, the option of “commission of government” was dropped in a second referendum held over a month later. The result of this vote was that the “confederation with Canada” alternative was chosen. It should be noted that most of the Avalon Peninsula voted for responsible government while the rest of the Island and Labrador voted for confederation. After confederation, elections were held and the Liberal party was elected with its leader being Joseph (Joey) R. Smallwood.
Our story continues, taking the approach of how the various premiers dealt with the challenges before them and the outcomes that resulted. Carefully, intertwined with the efforts of the premiers are the relations and interventions of Ottawa. The general understanding of this paper is that many of the challenges and considerations that existed in the time of the Commission of Government (1934-49) have traces that still exist today in varying degrees. Naturally, there are many new ones and here it is our demographic profile that stands out. Our population size is about the same as it was in 1971 but it is much older and in decline for the foreseeable future. We focus our story on eras, that is, periods of time. While this paper serves as a background to helping us understand our fiscal crisis and the solutions towards a sustainable fiscal framework as laid out in our next paper, the transition that we examine is not just about economics but takes a more holistic approach to include social, cultural, demographic and geographic factors which help to explain Newfoundland’s societal and economic transition.
7 Some Hypotheses
Our more specific hypotheses are as follows:
• Newfoundland has struggled with the transition of its society and economy which was oriented to primarily a traditional (feudal) small boat inshore fishery spread out over a vast geographic area to a modern efficient, flexible and sustainable fishery capable of providing a decent standard of living. The very nature of this fishery has been a “brake” on the transition process which is currently in the final stages of adjustment.
• The efforts of the Province in trying to foster good-paying jobs consistent with a modern economy through the private sector, often under the banner of “diversification” have been immensely challenging. There have been some successes at diversification when economic development has been tied to Newfoundland’s and Labrador’s comparative advantage in natural resource production of staples commodities. More often, there have been failures when attempts at diversification run counter to our comparative advantages.
• Wide spread and scarcely populated communities and regions, which are predominantly associated with the traditional fishery, hold the dominance of political power in the province and have viewed the receipt of local public services as a right. Our third paper deals with the politically unresolved nature of this right.
• Jobs in the construction industries have been a very important stepping-stone in the transition from often lower paying jobs in the fishing industries to higher-paying cash jobs.
• Jobs in the public sector have become increasing important to the economy in providing good-paying, year-round and secure employment requiring modern levels of education, at least partially as a result of the lack of success in providing sustainable employment in the private sector. This observation particularly holds for the areas outside the main population centres.
• Our labour markets have transitioned from jobs associated with goods production to service production, although goods production is primarily focused on natural resource extraction and processing.
• Local merchants/entrepreneurs have often been replaced by foreign-owned corporations with local managers.
• Since NL joined Canada, Ottawa has been a major source of funds in part to achieve political goals, but also to enable and support efforts to develop sustainable regional economies. Often, however, these investments have been without an appreciation of
8 the provincial economy and the social and economic barriers to accomplishing economic change.
• The provincial structural deficits that have occurred in about 85% of the fiscal years since confederation with Canada are the result of our provincial governments trying to provide equitable levels and qualities of essential public services comparable with those elsewhere in Canada while at the same time trying to promote modern, local and sustainable economies.
• Over the past 85 years there has been a remarkable transition from an almost feudal economy made up of hundreds of communities centered on the inshore cod fishery to a more diversified modern and more urbanized one integrated with Canadian levels of public services and North American standards of living. The social and associated demographic changes are just as remarkable.
In the pages which follow we try to provided evidence in support of these hypotheses, but we also attempt to avoid placing value judgements (good or bad) on the events. “After-the-fact” value judgements are easier to make than those at the start of a well-intentioned policy or program.
We comment on the general forces that shape program and policies, perhaps too briefly, and ignore completely the efficiency of government. However, leadership and the efficiency of government in its delivery of services is very much on the agenda today on a go-forward basis. A strategy for measuring and dealing with efficiency is left to be discussed in our 3rd paper in this series.
The Initial Transition: 1949-1971.
Entering Canada, the new premier, Joey Smallwood faced enormous challenges:
• How could the economy transition from a dying industry operating under almost feudal conditions and often only providing a subsistence living to well-paying jobs consistent with a modern industrialized economy?
• How could government meet the public’s new and growing taste for consumer goods?
• How could governments provide higher standards for health and education to a population dispersed into many small communities over such a wide geographic area?
• What responsibilities would the new government have within the Canadian Confederation?
9 With confederation on April 1, 1949 came certain fiscal transfers from Ottawa and also Ottawa’s acceptance of responsibility for paying a large portion of the dominion’s debt. Ottawa also agreed to have the CNR (Canadian National Railway) assume responsibility for the Newfoundland Railway. At the citizen level, Newfoundlanders and Labradorians appreciated the transfers from Ottawa in the form of more generous old age pensions available at the age of 65 rather 70 and baby bonuses. Newfoundland workers also became eligible for unemployment insurance benefits, admittedly with much fewer benefits than exist today.
Industrial Diversification
It was in this environment that Joey Smallwood began a career as Newfoundland’s first premier. Smallwood, often referred to as “Joey” was also known as the “little man from Gambo”. Whatever, Joey may have lacked in stature he made up for in his commanding presence, which was characterized by boundless energy and by his charismatic and visionary banter. He was a “doer” and used the above attributes, as well as his being a strong leader, in his attempts to transform his visions into reality. Joey quickly tackled the task of promoting much-needed economic development. Smallwood’s economic development strategy seemed sensible. Knowing that the fisheries was in decline and required modernization, and knowing as well that the Newfoundland economy was almost entirely dependent on the fisheries, Smallwood sought to diversify the economy. Diversification became an ongoing industrial strategy. In 1950, Smallwood hired Alfred Valdmanis, a former Latvian businessman and consultant, to be his Director General of Economic Development. By 1952, under Valdmanis’ guidance, Atlantic Gypsum, Atlantic Hardboards, Newfoundland Tanneries, North Star Cement, Superior Rubber, and United Cotton Mills had set up shop. Most of these business adventures eventually failed. It could be argued that these outcomes associated with attempts at industrial diversification were predictable given that they ran counter to Newfoundland’s natural resource-based, comparative advantage. Those individuals who call for industrial diversification today would be well advised to remember this lesson.
By 1953 Valdmanis had been removed from his position and his unscrupulous business activities resulted in his being put him in jail for a couple of years. However, efforts to diversify the economy continued. The oil refinery at Come-By-Chance, the Churchill Falls hydro-electric generating facility in Labrador and the Linerboard Mill in Stephenville which used wood from Labrador were all parts of this development and diversification effort. Iron ore mining, which had begun on Bell Island in 1895, ceased operation in 1966 but major iron ore facilities in western Labrador commenced operations in 1962 at Carol Lake near Labrador City. While economic diversification and development cited above occurred during this period, the fisheries continued to be the industry where relatively most of the jobs were to be found. The other observation is that with rapid population growth, an increasing number of good paying jobs were needed to limit out-migration and keep our provincial economy growing. In our opinion, “providing jobs” became an underlying development objective with resource rents, a forgotten consideration.
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Unemployment Insurance, Seasonal Work and Household Production
In 1956, fearing that he might fail to get re-elected, the federal Prime Minister of the day, Louis St. Laurent, decided to appeal to Atlantic Canadian voters by amending the Unemployment Insurance Act to include self-employed fish harvesters and seasonal workers. Including self- employed fish harvesters rather than those who were paid employees under the Act, effectively ended the insurance principles of the Act. The current inclusion of the word “insurance” as in Employment Insurance serves a useful political purpose but is inconsistent with insurance principles as understood by economists. St. Laurent was not re-elected and John Diefenbaker became Prime Minister but the generosity of the UI program had increased. More importantly, some academics would argue that UI changed the work ethic and culture in industries such as fishing and construction. Dependency on the UI program increased to such an extent that for many its benefits became the main source of income from working. Beneficiaries from the program might argue that they did not design the program but politicians did. Our perspective is that unemployment insurance benefits are integrated into household home production as a source of cash income so as to maximize household economic well-being as explained below.
Although fishing activities were generally seasonal in nature, the thousands of jobs they provided in many smaller communities provided a “sustainable” standard of living when combined with UI benefits and household production but not at “income” levels comparable to Canadian average. It should be pointed out that “household production”, in the sense used here, is somewhat consistent with the work done by fishing families in traditional outports and includes the production of any goods or services useful to the family, the extended family, or friends and neighbours. The primary distinction is that the household production work is not for pay and can be distinguished from the labour services provided in formal labour markets. Labour services for household production can therefore be considered as a substitute for that provided in formal labour markets or informal labour markets where cash is exchanged. In short, where high-paying work is available then household production will go down. Traditional workers living in rural areas were very competent in a variety of labour tasks needed for surviving and achieving an acceptable standard of living. UI/EI income can complement household production labour in that these benefits can be used to buy the capital or materials needed in household production activities. For example, UI benefits could be used to buy the windows for the family home. This process may explain why visitors to Newfoundland and coastal Labrador are often surprised to see well-built tidy homes in vibrant communities rather than seeing evidence of poverty as might be expected given officially published income statistics. We note that this type of home-production activity is not unique but is similar to that found in many rural communities throughout North America and other parts of the world. Theoretically, economic well-being is defined from a consumption and not from an income perspective, that is, from what an individual consumes rather than what one earns. Therefore, from an economic perspective the outcomes were good news; Newfoundlanders in these communities maximized their economic well-being by achieving a lot with low levels of employment income and unemployment insurance benefits. Any labour market economist, will confirm that such activity is consistent with rational economic behaviour.
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It should also be mentioned that the high rates of unemployment, often associated with our province, relate to a different cause of unemployment than that normally identified by economists and predominantly associated with urban industrialized economies. Historically, macroeconomic policies have been concerned with jobs lost to cyclical unemployment associated with economic depressions or recessions. The unemployment which is experienced in the rural parts of Newfoundland and Labrador is due to the seasonal nature of employment, such as that experienced in the fishing industries or the construction industries when work can only be carried out in certain months of the year. Therefore, if one were to examine longer term unemployment that is 27 weeks or longer the rates are comparable to elsewhere in Canada. Statistics Canada provides these types of data in their Annual Work Patterns and Labour Market Activity Surveys. The percentage of the core working age population, say 25-54, which finds employment at some time during the year would be comparable to other parts of Canada. Many Newfoundlanders and Labradorians who cannot find work over some longer period of time have historically moved or worked inter-provincially or internationally. The higher rates of unemployment in rural areas are, in our opinion, therefore a result of the nature of the work, culture and lifestyle associated with place, integrated with the UI/EI program for the income benefits provided. Being “unemployed” in rural parts of the province does not imply one is not working as work efforts are directed away from formal labour market work, that is most usually not available, to household tasks and activities providing productive labour services often for the home, helping friends or neighbours or the community in general. Many of these activities offset cash in communities where per capita incomes are most often much lower than in areas that are dominated by year-long formal labour market work. In a discontinued survey, the Newfoundland and Labrador Statistics Agency found that individuals living in rural areas and being employed in seasonal occupations enjoyed levels of life satisfactions as high as those with full-year full-time work and more than those with part-time work, that is, less than 30 hours per week. One last observation is that the usual monthly labour market statistics from Statistics Canada clearly demonstrate that these data for the St. John’s Census Metropolitan Area (CMA) are very similar to other Canadian urban centres. The differences in our provincial unemployment rates are due to the fact that a larger percentage of our population lives in rural areas.
At the end of our era, there was a major change to the Unemployment Insurance (UI) Act. The new Act brought in almost universal coverage. Other changes mandated that individuals had to only work 8 weeks of the previous 52 to qualify for UI and those eligible could receive up to 51 weeks of benefits. Moreover, individuals could receive UI for reasons other than involuntary unemployment, such as illness, maternity leave or retirement. In summary, the benefits under the program were greatly increased and these had an impact on the desirability for, and support of, part-year employment. For occupations in the fishery and construction these changes represented a significant subsidy to the employment in these sectors. The major “winners” from these UI changes were not only the workers, but also their employers who as “merchants” might be the local retailer. The smaller communities also were “winners” in that many of its residents could remain in the community ready to volunteer services such as in the volunteer fire department and justifying the need for workers for example to provide essential
12 public services. For these communities, these UI changes represented a “win-win-win” situation and have played an important role in maintaining incomes and increasing the level of well- being in hundreds of smaller towns that did not have consistent sources of longer-term employment.
Comparable Levels and Quality of Essential Public Services
Smallwood believed that modernization implied the delivery of essential public services, primarily health and education to all Newfoundlanders. This theme and policy strategy had been emphasized by Commission of Government in the mid-1930’s and formed the backbone of their economic recovery strategy, although as noted earlier the most transformative and also positive economic shock was due to the establishment of American and Canadian bases in Newfoundland and Labrador. To be clear, the delivery of essential and comparable levels of public services at reasonable levels of taxation was virtually impossible when the population was scattered across hundreds of small communities often only accessible by boat. Smallwood’s solution was to resettle these communities into “growth centres” where such essential public services could be provided at more affordable costs and with increased economic development more employment opportunities could occur. These programs were in place from 1954-1975. Vestiges of these programs still exist today with the much-restrained Community Relocation Policy. One other observation should be made with respect to the delivery of essential public services and one noted by Smallwood in the early 1950s and that was that these services provided much needed jobs for the rapidly expanding workforce. Over time these provincial government jobs in the civil service, health and education, as well as highway building and maintenance and parks, became a fundamental leg of sustainable economic development, particularly in the rural regions. The jobs in these sectors often provided secure year-round, full-time employment. With a given amount of revenue available to finance provincial government expenditures slightly lower wages were traded off for more “jobs”. Consideration of this trade-off exists to this day. For example, relatively recently, even before the pandemic recession, the Ball government negotiated with the unions to freeze nominal wages in order to avoid mass layoffs. From an economist’s perspective the cause for concern could be the use of the provincial government’s monopsonistic powers, that is as the sole employer of such services, to lower wages in the public sector although over the long run such powers would not exist. Secondly, the burden of a deficit reduction strategy may fall unfairly on public sector employees rather than any burden falling on the general voting public.
Construction Projects and Jobs
Construction projects provided the buildings and roads needed for the delivery of essential services of a modern economy. Table 1 below provides a list of many of the major projects in this sector for institutional and industrial projects. In 1951, the number of construction workers
13 was just over 8,400. After adjusting for inflation, the value of the construction work was 2 1/2 times greater in 1960 compared to 1950 with the number of workers in 1960 rising to over 11,800. Similar increases in value were seen in the period between 1960 and 1971. In 1971, the Historical Statistics of Newfoundland reported that there were around 18,711 workers in the construction industry which was very comparable in numbers to the number of fish harvesters. Most (85%) of these harvesters were working in the inshore fisheries. TABLE 1
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Therefore, the pressure was on government to concentrate on jobs not only in the fisheries sector but also in the construction sector where government played a more direct role. With a
15 rapidly expanding and young population, job creation and maintenance were constant struggles.
Some Outcomes
The Smallwood era ended in 1972. Figure 1 below shows the increase in real personal incomes per capita which by 1972 were 2.7 times as great as in 1951. Quite amazingly this growth seemed to be a steady progression. Transfers to persons had gone from just over 11.4% of personal incomes in 1949 to 27.4% in 1972. The population had grown and the number of employed had grown but the periods of resettlement and urbanization meant that some of the soul of the island had been lost.
Over this era, other important changes had also occurred. People had more access to public services particularly health care and education. Money was spent on increasing the transportation infrastructure such as building the TCH (Trans-Canada Highway); the slogan of the day was “We’ll Finish the Drive in ’65 … Thanks to Mr. Pearson”. Not only was the road built with mainly (95%) with federal money but so were some modern hotels and service stations along the way. Around election time with a strong provincial voice in Ottawa much could be accomplished.
Figure 1
In the case of education, evidence of change was no more evident than the move of Memorial University from the crowded Parade Street campus to the new campus off Elizabeth Avenue in
16 1961 and in the offering up of new programs. In 1965, Smallwood offered free education to all first-year students which was later “means tested”. While no firm figures of its impact are available, Memorial’s Vice-Chancellor at the time estimated that in 1968 about 40% of Memorial’s students were fully funded and a further 40% had some partial funding. The program was consistent with Smallwood’s belief that education was the key to economic prosperity. Coupled with the reality of very low incomes and levels of university education, the program was a catalyst in transitioning younger people away from fishing in the smaller communities into higher-paying jobs in the more urban centres. However, an unintended consequence was that many students emigrated to the “mainland”. In addition, many school teachers, although having completed high school, did not have formal university training in education. Smallwood permitted such teachers who attended Memorial to count the years at university as years of service towards a pension. The impact on teacher training was very pronounced as might be expected.
In 1969, the renamed Memorial University took in its first students to the Faculty of Medicine. In the fall of 1949, there were 307 undergraduate students. By the fall term of 1972, there were almost 7,000 undergraduates, 702 graduates and 3,134 part-time students. University education in the province had moved from being the dominion of relatively few students from the better-off families to a more democratic profile representing a much larger segment of the population. While gaining knowledge in the controlled environment of a university setting was important so too was the opportunity for social interaction with large numbers of others in your own generation. During the latter part of the 1960s, student activism occurred throughout much of North America and Memorial was no exception. Perhaps it was the desire for change from a much-enlarged younger generation that accounted for Smallwood’s defeat at the polls and ushered in the new Conservative government under Frank Moores.
While the population in 1935 was about 290 thousand, by 1945 it was about 322,000 and then grew to 361,416 in 1951 and finally to almost 532,900 in 1971. In other words, Newfoundland and Labrador experienced a very large population growth during the period we are discussing.
The other rapid change during this period was the decline in the market share of consumer goods sold by businesses locally owned or not operated by local franchises. This movement was likely caused by two factors. Firstly, locally-owned businesses before confederation faced little outside competition because of the high tariff barriers which existed in the dominion and secondly, these larger outside businesses probably had the advantage of scale economies where they could provide similar goods at a lower cost. Such economies of scale are a commonly recognized feature of today’s economies and account for globalization, increasing income inequalities, where jobs are lost to countries with cheaper labour, and the rise of international plutocrats. Another prominent feature of industrialization was increased urbanization. In Canada, our four largest metropolitan areas account for 40% of Canada’s GDP. The last point of economic interest is the movement in terms of employment from a goods- producing economy to service-producing one in which there are a relatively more jobs in retail trade although the public sector provides stable year-round and well-paid employment.
17
1972-1996: Changing Industrial Lanes
We arbitrarily chose 1972 as the beginning of this next period. This year was the one in which Smallwood was forced from office and Frank Moores took over as premier of the province for the Conservatives. This transition seemed to reflect a change in the mood of the populace which was now relatively younger and more educated. Throughout North America, younger people were tired of the status quo. In Newfoundland, people were tired of the adjustments associated with resettlement. Perhaps they were also tired at the failures associated industrial diversification and they may have been tired of the type of autocratic government which many felt Smallwood led. In any event it was time for change.
Many of the major challenges which Smallwood had faced remained during the Moores administration and later when Brian Peckford was in office. With a rapidly growing population there was always the need for jobs. The fisheries were still a major employer especially in the rural areas. It should be noted that with changing technology, jobs in the forestry sector were also rapidly disappearing. The dependency on the fisheries and the decline of the forestry sector with low incomes and unstable nature, coupled a growing educated population, kept the cry for “diversification” alive. Good paying jobs were needed if Newfoundlanders were to have a standard of living at levels enjoyed by other Canadians and not be labelled as “poor”. Unfortunately, most of the attempts by Smallwood at industrialization by and large had failed. In addition, the latter part of the 1970s and into the 1980s were characterized by rapid inflation in prices particularly related to the prices of oil. The rapid rise in energy prices also brought attention to the perceived unfairness of the Upper Churchill Falls Hydro Contract. Finally, the spectre from the 1930s of the loss of self-government and being managed from afar was always there and so self-reliance to manage the provincial destiny was paramount.
The Fisheries Economy
To say that the fisheries had not changed in the period since confederation was not true. It was true that the small boat inshore fishery was the mainstay of most of the smaller coastal communities. But even here the boats became slightly longer and inboards and some outboard motors had become the norm. As Europe and other countries recovered from the war, their fleets crossed the North Atlantic and fished not only off the Grand Banks but 12 miles or more off coastal waters. The joke at the time was that some communities did not need street lights because they were lit up from the trawlers offshore. There was a change in fishing methods then and it was the use of trawlers. This method of fishing was “efficient” but it was also destructive in that it was not selective in catching targeted fish such as halibut or yellow tail flounder and thus had a large amount of unwanted bycatch. The traditional fishery was cod and the bottom trawlers used to catch that species would destroy crustaceans such as lobsters and crab. You can only catch a fish once (not strictly correct) affecting the catches of the traditional inshore fishermen. In response to this situation, in early 1977, the Canadian government
18 announced the extension of its fishing zone from the traditional 12-mile limit to 200 nautical miles. While foreign harvesters could fish in these zones, permission to do so was dependent on approval from Canada. With these changes in regulations the fortunes of the inshore fishery began to increase. Provincial harvesters were expected to substantially increase their catches as these catches were previously those caught by foreign vessels. In St. John’s the disappearance of these foreign trawlermen and their vessels was pronounced.
During the late 1960s and for most of the 1970s the government of Pierre Trudeau actively sought to modernize the federal government including reducing regional disparities and increasing financial support to those in need. Subsequently, the Department of Regional Industrial Expansion (DREE) was established in 1969. DREE was replaced by DRIE (the Department of Regional and Industrial Expansion) in 1982 and, in 1987, was “regionalized” for the Atlantic Canada area so that we now have ACOA (the Atlantic Canada Opportunities Agency).
The relevancy of these federal administrative efforts and the establishment of the 200 mile economic zone was that starting in the late 1970’s, DREE supported fish processing plants in many small communities. By the late 1970’s and the start 1980’s, there were 260-270 plants in the province. With this development, there were plenty of local construction jobs thereby supporting local economic development. In addition, each plant had fishers who normally supplied raw material to the plant and were allowed to catch up to a certain limit of the biomass of a stock depending on their specific license. The plants became the bedrock to many smaller communities and the surrounding area for sustainable economic development. The system would work well were it not for certain changes, resulting from both natural and human causes, in the eco-system that resulted in the eventual collapse of the ground fisheries.
As we have stressed, fish harvesting and fish prices like other staples (natural resource products primarily for export) are subject to dramatic shifts in supply, demand and prices such as occurred in 1932. In other words, such peaks and troughs, like the waves off the Grand Banks, are to be expected even if some days the waters are calm.
Fish prices and catches collapsed during the early 1980’s due to a variety of causes including over-fishing, leading to the failure of large companies such as Fisheries Products. The result was the financial intervention of the federal government to reinvent such companies, in the above case as Fisheries Products International.
The turbulence witnessed in the fisheries in the early 1980’s smouldered into the 1990’s. In 1990 three offshore plants closed down and many workers lost their jobs. In response, the federal government introduced the AFAP (Atlantic Fisheries Adjustment Package), which was targeted at fish processing workers in these plants and offered the potential of training and upgrading their educational qualifications. Independent studies based on tax-filer data using advanced statistical techniques demonstrated that workers who opted for training did experience higher incomes as compared to those who did not. The popular belief, at the time, was that these training programs were unsuccessful and trained workers for non-existent jobs.
19 The lesson to be learned is that administrative data coupled with scientific methodology may run counter to popular belief. You can probably count on it.
However, widespread disaster did occur in the fishery over the next two years with the failure of the northern cod fishery and then the general ground-fishery. This fishery continued to be the economic backbone of the majority of smaller communities and therefore naturally had ramifications on the economies of the larger towns and cities. The federal government intervened once again, to provide financial assistance and education/training to fisheries workers essentially maintaining their standard of living, first with the NCARP (Northern Cod Adjustment and Recovery Program) and then with TAGS (The Atlantic Groundfish Strategy). In the 1992-1999 period the federal government paid out $1.7 billion from the TAGS/NCARP program. The program was in full force during the 1993-1998 during which the average annual benefits paid out were about $9,600 and average annual benefits were around $6,525. It would be interesting to know what the average total income and EI/TAGS transfer income was per family but these data have not been accessed by the authors.
In spite of the transfer assistance from the federal government, many workers and their families saw the need for dramatic adjustments. As Figure 2 illustrates, employment in harvesting, which was primarily made up of male workers declined over the decade while processing workers declined until from 1989 to around 1994.
Figure 2 Fishing Harvesting and Processing Employment as a Percentage of Total Employment in NL, 1987-2011
Source: Newfoundland and Labrador Statistics Agency
Figure 3 seems to reflect the general malaise with respect to employment throughout the economy. What is surprising is that male employment over the last 45 years has remained
20 relatively stagnant, although there has been a shift in occupations especially in the goods producing sector from fishing to construction trades.
Figure 3 Household Employment in NL, 1976-2018 by Gender 300 Both sexes 15 years and over 250 Males 15 years and over Females 15 years and over 200
150
100
50
0 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Statistics Canada. Table 14-10-0018-01
During this period when the groundfishery and associated processing plants were closed, many workers took advantage of training and education programs which were being offered as part of an adjustment package to obtain certificates of high school equivalency or trade qualifications. An interesting observation made by educators during this time was that those children who were in families in which the mother was receiving training were more likely to complete high school. We infer that if mother could learn math then the children had few options. The lesson for applied labour economists is that training programs may have both direct and indirect impacts
Figure 4 shows that there was a dramatic decline in the provincial population as many fishing families and many others impacted by the collapse of the fisheries left the province. No doubt education and training facilitated this outmigration. This period of adjustment seemed to slow down after 2000 when TAGS ended.
Figure 4
21 Newfoundland and Labrador’s Population, 1981-2019. 600,000
580,000
560,000
540,000
520,000
500,000
480,000
460,000 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: Statistics Canada, Demography Division
We cannot end our discussion of the fisheries during this period without mentioning the outstanding role that the Fish, Food and Allied Workers Union (formed in 1970) played during this very difficult period in trying to further the rights and economic interests of harvesters and plant workers. One could easily imagine how in the traditional fishery of the past, the widely geographically-dispersed small groups and harvesters would have had little bargaining power against the more tightly knit group of wealthier merchants. Similarly, a lack of bargaining strength might have existed with plant workers. The forces for change in the fish harvesting and processing industries discussed in this section reflected in the employment profile shown in Figure 2 has been and remains an uphill battle for the union.
In summary, it is clear that the fishing moratoria in the 1990’s dramatically altered the nature and the prominence of the fish harvesting and processing industries in the Newfoundland and Labrador economies. The severe contraction of the fishing sector also caused occupational structural changes and dramatic increases in outmigration.
It would be natural to conclude that the fishing moratoria must have resulted in a severe recession in our economy and that the standard of living must have declined. Figure 5 examines real disposable income per capita, that is, the amount of money that each individual might have had after receiving market income and then paying their taxes but receiving transfers during the fishing crisis from 1989-1999. Adjustments were made on our estimates to account for inflation. The red line shows that there was no decline and in fact, perhaps a slight increase. How was this possible when so many were thrown out of work? We have already discussed the answer when we covered the federal transfers to individuals during the period and perhaps the construction work associated with the Hibernia GBS.
22 Figure 5 also demonstrates that in the period from 1949 to 2001 our real disposable income per capita relative to that of Nova Scotia and to Canada remained relatively constant. Although the fishing sectors are an important part of our economy, the service producing sector is larger in terms of jobs and incomes. The service producing sector is also important in terms of jobs and incomes. As part of Canada our economy is also affected by Canada’s monetary and fiscal policies and important transfers to persons, businesses and governments. During the 1990 to 1996 period Canada was in a recession as a result of its high interest-rate monetary policy designed to curb inflationary expectations. Surprisingly we do observe a recession at work in Canada and Nova Scotia during this period but not Newfoundland and Labrador.
Figure 5 Real Household Disposable Income Per Capita 30,000.0
25,000.0
Canada 20,000.0 Newfoundland and Labrador Nova Scotia 15,000.0
10,000.0
5,000.0
0.0 1949 1951 1953 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Source: Statistics Canada. Table 36-10-0229-01 Long-run provincial and territorial data
We note that the fisheries are still very important part of our provincial economy. We would argue, however, that beyond 1996, the industry, although heavily regulated, is governed more by market forces and is becoming more capital intensive. For the younger urban population, the fishery holds less nostalgic relevance than it does for the province’s boomers. For politicians, it seems that it is quietly supportive of the aquaculture industry while letting technological and market forces leaving the rest of the industry to find its own path forward.
The Emerging Oil Economy
23 In the background of the declines in the fisheries economy another important natural resource was finding renewed traction towards development. In the late 1970’s and early 1980’s oil and gas were discovered off Newfoundland’s east coast and in Canada’s Economic Zone. More importantly, the size of these discoveries coupled with prices per barrel of oil in the $19-20 USD per barrel for Brent crude oil made these discoveries marginally “economic”, that is, “profitable” to develop for production and distribution. To be more specific, profitability meant that over the life of the field a hurdle rate of return of around 15% annually could be attained. Such a rate covered a wide variety of risks including geological and dramatic fluctuations in the world price of this staple.
The Government of Canada believed that these resources and therefore any associated rents belonged to Canada. The Government of Newfoundland and Labrador had challenged this contention of the Federal Government before the Supreme Court of Canada arguing that the newly discovered offshore oil resources would be treated as if on land and therefore any oil royalties would flow to the Province. The Province would also manage certain regulatory issues related to development of these resources. In 1984, the Supreme Court ruled in the Federal Government’s favour. Later that year, which just happened to be an election year, the leader of the Conservative Party made an election promise that if his party were elected then the province would be given equal say over management and it would be the primary beneficiary of any benefits arising from development and production of the industry. At that time the primary benefits were seen to be the construction jobs associated with the development phase of the project, although eventually some resource rents in the form of royalties might be realized. When the Conservative party was elected with a majority, it followed through on its promise and, in 1985, the Canada-Newfoundland Atlantic Accord came into being. The hope by the then Provincial Premier, Brian Peckford, was that the discovery and control of the resource would make the province self-sufficient. The transfer of the rights of economic benefits from the federal government to the province would prove to be perhaps the most significant economic development since confederation or the construction of military bases in the 1940’s.
Oil development began with the construction of the GBS (Gravity Based Structure) at Bull Arm around 1992 but, it should be noted, that for this to occur that the Hibernia oil field development required guarantees from the Canadian Investment Corporation (CDEV), a federal Crown corporation. In addition, a subsidiary of CDEV, the Canada Hibernia Holding Corporation, took an 8.5% equity in the Hibernia oil field; this investment was needed in order for the Hibernia field to be developed since an original partner had dropped out of the field ownership. The economics of undertaking such a large long-term investment are risky since commodity prices established in world markets are subject to large fluctuations and determining the actual size of the resource at that time is impossible to be known with certainty. The estimate of recoverable oil at the Hibernia field was initially thought to be about 650 million barrels but these estimates have been revised upwards several times and is now slightly more than 1,400 million barrels.
This Hibernia development came at a very opportune time and helped in moving unemployed, but naturally skilled workers out of the fisheries into construction. While these workers were
24 primarily men, increased education and a rapidly growing service producing sector provided increased opportunities for women. Admittedly, the jobs in construction were highly paid due to demand factors, the unions and the pressure put on the construction and oil firms to use local labour.
Provincial Government Leadership
Our era begins with Premier Frank Moores and society catching its breath after the hectic social and economic changes that had taken place under Smallwood.
There was the completion of the Health Sciences complex in St. John’s in 1973 as well as the Escasoni retirement home in 1977 but there was not nearly the effort in infrastructure investment that there had been in earlier years.
Premier Brian Peckford faced two major economic forces moving in opposite directions. As was discussed earlier, the fisheries faced contraction and adjustment and yet was the mainstay of the economy in rural areas. At the same time, oil and gas development held the prospect of diversification, economic improvement and financial self-reliance for the provincial government. To be clear and as already noted, the main benefit from oil and gas development was to be found in the good-paying construction jobs. As a result, the Peckford government supported the construction of a Gravity Based Structure (GBS) rather than a Floating Production Storage and Offloading system (FPSO).
In the economic background were high unemployment rates, growing make-work jobs, and a work-culture of dependency to secure unemployment insurance benefits. This culture was known as “10-42”, that is, 10 insurable weeks of work yielded 42 weeks of UI benefits. It was with this background that the Royal Commission on Employment and Unemployment was established in the mid-1980’s. Near the end of his term, the Peckford Government led economic development with the Sprung Greenhouse. The venture proved to be a financial and political fiasco but was undertaken under the cloud of frustration and a desire for action. Peckford also realized that action was needed to bring provincial government deficits under control by reducing public expenditures. This reduction could be achieved by altering the delivery of services and changing the perceived work-culture to year-round jobs. Such actions for change are difficult however, because people believed that such change was threatening the best interests of their community. In many rural constituencies the elected members or their family and friends are known personally to the constituents and therefore personal social pressures can be applied. In addition, any negative fiscal changes, such as a school closure, would immediately be known and discussed by a majority of constituents, this making the life of the elected official somewhat stressful. It is likely that members of the House of Assembly are elected with the understanding that local benefits will be delivered.
Near the end of its term, the Peckford administration concluded the Roads for Rails Agreement in 1988 which amounted to $800 million of federal money for roads construction and severance
25 packages for railway workers in order for CN to be able to abandon its responsibilities to run the railway in Newfoundland as required in the 1949 Terms of Union.
In 1988 fiscal storm clouds were brewing as there was rising inflation, coupled with rising unemployment and, as noted previously, challenges in the fishing industry. There were also constant deficits with debt service charges beginning to crowd out other expenditures on essential services. The energetic Brian Peckford retired from politics, perhaps not ready to cut back on services in health and education in particular.
Tom Rideout took over for a very short period of time in 1989 only to be replaced by Clyde Wells who was a successful litigation lawyer. Wells carefully listened to evidence before making a decision. However, once the decision was made there was no reversing it. Wells was consistent with his profession.
During his initial years in office, Premier Wells not only faced a fisheries crisis but the Bank of Canada along with other central banks had once again raised interest rates in order to curb inflationary expectations which were abundantly evident in 1989 and 1990. The result of these high interest rates was the intended recession. These high interest rates raised the cost of borrowing by the provincial government. The practice of running provincial government deficits fell particularly hard on this government and there existed a distinct possibility that the government would have to declare bankruptcy if the economy deteriorated further as was expected and indeed occurred. Wells moved forcefully to counter these financial forces by reducing the size of the provincial civil service and implementing wage freezes. As noted earlier, the Federal government provided very generous transfer programs to those in the fisheries which also had economic impacts on the wider community. The results were that the provincial government managed to stay financially afloat and the economy did not collapse.
Premier Wells was well aware of the challenges he faced. In 1990, Wells created the Economic Recovery Commission (ERC). The purpose of the ERC was essentially to implement the recommendations of the 1985 Royal Commission Report on Employment and Unemployment and to promote self-reliance and an enterprise culture. This included the small and medium enterprises in the various sectors of the economy. In 1992, a Strategic Economic Plan was released. The existing Newfoundland and Labrador Development Corporation, which was established in 1973 with some funding from DREE, was renamed Enterprise Newfoundland and Labrador and fell under the leadership of the ERC. These organizations were quite active and creative in their thinking. While economic development took on a sectoral approach, there was also an emphasis on community development with the idea that small communities within a particular region should co-operate to form sub-regions and that economic development would also be coordinated with social development and in particular with education and training and income security reform. It was recognized that both of these activities would have to occur if workers were to transition out of the traditional occupations in fishing or logging. As noted earlier, evidence clearly showed that such training and education for harvester and processors did have a positive impact on the standard of living of the individuals and therefore their households. The Royal Commission had suggested settling up 17 economic zones within the
26 province and that development plans for these zones would be locally-driven. A joint federal- provincial task force on community economic development was led by the ERC and ACOA. Eventually, 18 (later 20) Regional Economic Development Boards (REDBs) were established.
With the creation of the REDBs the existing 59 Regional Development Associations (RDAs) began to phase out. These RDAs began at the local level in the 1960s and received core funding from the Department of Rural Development under the Moores Government in 1992. By 1994 there were 59 RDAs up from the original 15. The RDAs represented the bottom-up approach to economic development. The REDBs also represented a bottom-up approach.
In 1985, the Royal Commission on Employment and Unemployment argued that the existing UI program was keeping workers in traditional seasonal occupations, such as fishing and fish processing and therefore acted as a barrier to the transition to a modern industrialized economy. The outstanding feature of the UI program was captured in that label “10-42”. Ignoring the work involved in home production, there was a general perception outside the province and, to some extent in the province’s urban centres, that such UI recipients were not interested in formal work. The belief, by some, was that the UI system fostered a culture counter to the traditional one of rewarding hard work. In our opinion, it is correct that the UI program at least partially explained the very high rates of unemployment in Newfoundland since that program enabled workers to retain an attachment to seasonal work that was a significant contributor to high unemployment rates which might not otherwise be possible. It also likely impeded the transition to better paying occupations that required higher levels of formal education. To many younger people living in smaller rural communities it would seem that jobs in the fishing industries coupled with UI would offer an acceptable living standard when coupled with home production, surrounded by friends and family and avoiding a daily commute. We believe that part-year employment coupled with UI/EI and home production represented a rational choice that maximizes household well-being for many families given the above conditions, available information and opportunities, and the preferences of these individuals.
In any event, the Royal Commission cited above recommended fundamental changes to the UI system so as to remove the disincentives to “work” and promote the transition to better-paying jobs. As noted earlier carrying out this recommendation of the Royal Commission, as well as others, was a major reason for Wells’ creation of the ERC. The ERC produced an Income Security Program (ISP) to basically replace EI. The basic idea was to take the money coming into the province in terms of UI benefits, which was $675 million in 1995 and bearer to $900 million when TAGS benefits were not being received, and then redirect this money to those individuals and families most in need. The ISP was basically a guaranteed-annual-income program targeted to the poor. The “losers” from this proposed reform were primarily workers in the fishing industries and the construction trades. In addition, those individuals receiving regular UI benefits but working for cash would also be negatively affected since they might not receive ISP benefits. The unions representing the workers in the associated occupations were vehemently opposed to the ISP. When Wells administration ended so did the provincial government
27 support for the ISP. The “winners” under the ISP would have been the many families living in poverty.
The UI program was, and still is, an important source of sustainable income particularly in the rural areas of the province which is often characterized by part-year employment. With the decline in the fisheries many workers would not qualify for UI. The alternative was income support payments that might not be as generous as UI benefits. Income support payments came from the province. Both levels of government saw a need for people, particularly living in the rural areas to have access to paid work and ideally, with enough weeks of work that would permit them to qualify for UI benefits. For the province, an added fiscal benefit would be that, to the extent that individuals could qualify for UI benefits, families could potentially move above poverty levels. In such cases, the province would not have to provide income support payments. There were cases where workers received UI benefits which were topped up with income support payments. Both levels of government provided grants to not-for-profit groups that would provide work to complete community-based projects such as painting a church or building walking trails. These government-funded projects were referred to as JCP’s (Job Creation Projects). The number of jobs created under these JCP’s grew substantially in the 1980’s and into the early part of the 1990’s peaking in later years at some 35,000 jobs. While the JCP jobs provided income to workers they also help to curtail the labour market transition process to better jobs. Premier Wells realizing this impact, significantly curtailed the provincial use of JCPs, presumably, in the hopes of encouraging individuals to find private sector employment in the labour markets.
A strategic social planning group began to develop the Strategic Social Plan. This new plan had as a central focus the ERC’s comprehensive reform of income security and related issues such as education and training, social assistance and social housing. This plan was never released. It should be pointed out that the ERC although closely aligned and strongly supported by Premier Wells operated quite separately from the provincial government bureaucracy and one might guess that the bureaucracy did not embrace the new proposals.
Wells resigned for “personal reasons” but one could easily believe that he was frustrated by the strong resistance to many of the program changes he introduced or proposed. No doubt Wells discovered that taking the necessary fiscal measures towards fiscal self-reliance and targeting programs towards alleviating poverty did not guarantee your popularity or even support from within your own party. The resistance to his fiscal measures must have been personally very difficult since he lived in such a small province in which the social network was very closely knit. As we discuss later, these same social-political forces were constantly present for premiers, politicians and members of the House of Assembly. Our perception of the local democratic process is that politicians are elected on the grounds of being able to best serve the interests of their constituents. As Smallwood summed the situation up, the first duty of a politician was to get elected as was his/her second, third and continuing duties. Personal detachment from a politician’s constituents is a feature that exists in large urban centres and not in smaller rural constituencies.
28
Other Ongoing Economic Activities
While our story has concentrated on the major noticeable transitions in Newfoundland and Labrador, we should remember that additional economic forces were working towards a more modern society consistent with elsewhere in Canada and more generally in the United States. For example, while employment levels for males had stalled, labour market participation rates and employment levels for females had increased. People of all ages began to gather in the evenings and weekends at shopping malls. In addition, more fast-food outlets appeared and many urban seniors now gathered in mid-morning at a Tim Horton’s.
Newfoundlanders and Labradorians were being integrated into the global society and economy not only by what they could buy locally but by the internet, email, and the world wide web with its associated browsers such as Google Chrome or Internet Explorer.
Our perception of the economic world was being shaped by foreign academic macroeconomists. By 1996, the central bankers had broken the idea of excessive inflation by the use of high interest rates. We were told that inflation rates should be between 2-3%. Public finance economists had curtailed expenditures in order to reduce debt-to-GDP ratios so as not to raise interest rates and threaten national or subnational bankruptcy. It was understood that a growing real GDP was good without necessarily knowing what the term, GDP meant. Moreover, productivity growth was important as was technological progress which was “endogenous”, that is, the result of the research activities of private-sector firms trying to maximize their profits. Evidence of such progress was embodied in ever more powerful and lighter computers. It was believed by some economists that recessions were a phenomenon of the past. This belief was shattered some four years later when the “dot-com” recession hit.
Also, ongoing in Newfoundland and Labrador’s economy were the iron mines in Labrador and the discovery of nickel-copper-cobalt deposit at Voisey’s Bay. The main economic benefit to the province is in the form of jobs associated with development and production as well as net income accruing to firms in the province that are impacted by the operations. Since these operations are owned by large international corporations located outside the country, the income accruing to capital, flows outside the country. Resource rents would generally be considered capital income.
Some Summary Observations
Figures 5 and 6 confirm that the standard of living for residents of the province did improve over the quarter of a century that the era covers between 1992 and 1996. It is true that there was somewhat of a decline in the first half of the 1980’s and then a very modest increase in the first half of the 1990’s. While the data would tend to lead us to believe that these living standards were somewhat lower than elsewhere in Canada, current data cannot strictly confirm this from an economics perspective since, as we have previously discussed, we cannot compare
29 living costs amongst provinces or communities and we do not accurately measure household production in the national accounts. The bottom line may well be that our standard of living is relatively higher than the official statistics and most Canadians, including ourselves believe.
Figure 6
Millions of Dollars NL GDP (Provincial Output) and Two Major Components, 1981-2018
40,000
Final consumption expenditure 35,000 Exports of goods and services 30,000 Gross domestic product at market prices
25,000
20,000
15,000
10,000
5,000
0 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Statistics Canada. Table 36-10-0222-01
An interesting feature of Figure 6 is that it demonstrates that GDP, the gross output of final goods and services in our province does not necessary move in lockstep with the final consumption expenditures of our residents. This reason for this is that changes in our GDP are often caused by changes in our exports. The lesson to be learned is that for our province GDP per capita is not necessarily a good measure of the economic well-being of our residents.
The transition to a more-diversified modern economy occurred with the collapse of the inshore fishery. The collapse triggered the movement to increased education and trades training. Unfortunately, it also triggered a mass migration out of the province. It was also paradoxical that well-intentioned government initiatives that tried to curtail the decline of the fishing industry may have inadvertently led to this eventual collapse. Specifically, funding to assist in the building of so many fish processing facilities given the extension of Canada’s economic fishing zone may have led to excess fishing efforts. John Crosbie probably had it right, “I didn't take the fish from the God damn water.”
1996-2014 Diversification in Natural Resource Developments
30 While Clyde Wells resigned in early 1996 having weathered very stormy economic and fiscal seas, Brian Tobin, another Liberal, became premier having been a popular Federal fisheries minister. Tobin abandoned the ERC and its Income Security Program. He retained the regional development activities of the REDBs. The Strategic Social Plan (SSP) developed under Wells was also abandoned and was rewritten focusing on a comprehensive integrated social, economic and community development approach to local decision-making. The SSP framework represented, in our opinion, a remarkably progressive public administration framework with the ultimate focus on well-being outcomes rather than inputs. It used evidenced-based decision-making overseen by a “social audit” in which programs and policies were to be evaluated based on their social and economic outcomes using criteria founded in a general vision statement with goals and objectives.
During early on in this period of time, construction of the GBS (Gravity Based Structure) for Hibernia was completed and with that oil field came into production in late 1997. TAGS was winding down and new a new profitable fishery was being developed with shrimp and crab, albeit with larger boats that had to go further offshore. The provincial economic development strategy adopted a more sectoral approach focusing on tourism and fully exploiting our natural resources by collecting rents and processing mining outputs within the province. It was during this time that Tobin investigated cooperating with Quebec to develop the Lower Churchill and specifically, the substantial hydro generating possibilities associated with Gull Island. This effort was later abandoned.
In any event Tobin resigned in 2000 to return to the federal cabinet. He was followed by Beaton Tulk and Roger Grimes who basically carried on Tobin’s work while oil development continued.
During the period between 1997 and 2000, the Canadian and Newfoundland and Labrador economies began to recover and the pace of increase in the economic well-being of families began to accelerate. Our offshore oil projects are very capital intensive and as such, in the years before, “payback”, that is the time at which the costs of the investment are recovered are expected to be very long. During this period of time before payback, the considerable capital income and resource rents portions of the oil revenues accrue primarily to the operators. We therefore should note that the province’s GDP (gross domestic product) or real output will take a different path from its GNI (Gross National Income), household consumption or resident economic well-being. Unfortunately, GNI is not produced by Statistics Canada at the provincial level. In summary, while a great amount of oil might be produced and oil prices are rising with revenue also rising, the actual impact on the economic well-being of the government and our residents will be relatively small since most of the revenue flows to outsiders.
31 Into the Seven Years of Abundance
In 2003, Williams had a popular reputation as a well-known lawyer and businessman. Like some former premiers he possessed energy and leadership qualities which might ensure that something would be done to advance the interests of the province. Williams had the fortune to preside over, what we have termed “the seven years of abundance”. This good fortune was due to the level of oil production and a dramatic rise in its price. Figure 7 below shows the production from our oil fields during this period and the expected future production. The Terra Nova Oil Field began production in January 2002 using a Floating Production Structure and Offloading (FPSO) as did Husky’s White Rose Oil Field which began production in November 2005. As one can see peak production from the first two fields occurred around 2003-04 while White Rose hit peak production around 2008. Figure 8 illustrates the dramatic rise in oil prices over this period. Because of the high quality of oil from these wells the price in U.S. dollars per barrel (USD/bbl) is the Brent price rather than WTI (West Texas Intermediate). The royalty structure for these fields is specific to each field and to the price of oil as well as the point at which oil revenues over time have paid for the infrastructure costs. While avoiding the details, the high price coupled with the level of production meant that the Hibernia field met “payout” far earlier than expected and therefore the royalties from this field were much greater than expected at that time. Around 2006 Hibernia began to transition into a jewel in ExxonMobil’s oil crown as the price for its crude oil began its rise above $60 per barrel.
Figure 7 Annual Production for Existing and Planned Offshore Oil Fields
Source: CNLOPB Reserve Estimates and forecasts
32 Figure 8
Source: https://tradingeconomics.com/commodity/brent-crude-oil taken August 18, 2020
Figure 9 below demonstrates the direct impact of oil revenues flowing into the coffers of the Government of Newfoundland and Labrador either from royalties or from corporate profits.
Figure 9
$ Millions NL Own-Source Revenue (With and Without Oil) $8,000
$7,000 Own-Source Revenue (With Oil) Own-Source Revenue (Without Oil) $6,000
$5,000
$4,000
$3,000
$2,000
$1,000
$0 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-10 2011-11 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19
Sources: NL Public Accounts, Dr. Wade Locke
33 Naturally, the impact of oil production on provincial revenues would be even greater if we were to consider the indirect and induced impacts of oil expenditures on provincial revenues. An example of these revenue spin-offs would be the income taxes and HST’s paid by construction and oil workers as well as business suppliers to oil firms. These direct revenues transformed the province from “have-not” status which depended on equalization transfers from the federal government to a “have” province. It allowed the Province to pay down a portion of its debt and run a surplus. As will be examined more fully in our next paper, using a literary license we state that the “seven years of abundance” for the provincial government, that is, when it experienced a surplus, ran from around 2006-07 fiscal year until about 2012-13. It was during this period of the Williams government, that Premier Peckford’s hope that oil would make Newfoundland self-reliant from Ottawa by not requiring equalization payments was then realized.
When the Great Recession hit in 2007 and 2008, oil prices collapsed to about the price that exists today. Such movements in the prices of our exports which are determined in world markets is a well-documented and therefore to be-expected feature of such natural-resource- based commodities. What makes forecasting the price of oil so difficult is that its price is not strictly determined by the competitive forces of demand and supply. Rather the quantity of oil supplied into world markets is also determined by the amount of oil that the OPEC cartel wishes to put on the market in cooperation with other major producers such as Russia. In short, since much of Newfoundland and Labrador’s production is focused on the export of such primary resource commodities or staples products then you can expect to live in a boom/bust economy. Knowing this, the seven years of abundance can be expected to be followed by years of “famine” as the Book of Genesis has noted. The lesson to be learned is to store some grain in the good years.
Construction Projects
The construction industry has been singled out for special consideration in this paper for several reasons. Firstly, the Newfoundland and Labrador economy have often been characterized by big construction projects that have merited public attention. It was acknowledged that a large part of the Dominion’s gross debt, which had brought it to virtual bankruptcy was attributable to the nationalization (in 1923) and then the operation and maintenance of the Newfoundland Railway. Subsequently, the large debt in part associated with this nationalization forced the government to abandon responsible government in 1933. An argument could easily be made that many of the factors associated with the construction and financial difficulties associated with the railway may present themselves with the Muskrat Falls project; time will tell. Secondly, as was pointed out earlier in this paper, since 1938 the construction industry has acted as a conduit for transition from traditionally low-income and declining work in the fisheries industries. Thirdly, over time, including the present, the provincial government has undertaken a number of infrastructure projects such as roads, schools, health care and long-term care facilities, and electrical generation projects which might be seen as not only being integral to the delivery of services but also having a “multiplier”
34 stimulative impact on economic activity within the province. Such work also supports workers and firms in the construction sector and forms part of a keystone in the government strategy for sustainable economic development in many regions.
As has been noted, there are a very large number of employed individuals who have been associated with part-year employment in this industry and the relative importance to overall employment has not been captured by monthly household employment (LFS) or monthly payroll employment numbers (SEPH) using taxfiler data. For example, in 2017, Statistics Canada reported that the average monthly payroll employment number in construction was about 17,800 using monthly taxfiler data while annual taxfiler data recorded payroll employment of over 28,300. This number would not have included self-employed contractors or those individuals who only worked for cash. Many individuals in the construction industry live in the rural areas but may work outside those communities. In this case, the sustainability of the community depends in part on these workers.
Figure 10, using monthly taxfiler data from NL employers, shows the growth in paid employment of construction workers from January 2001 onwards. As noted in the preceding paragraph, these data do not include self-employed workers nor do they include Newfoundland and Labrador residents who worked outside the province. This latter group of construction workers increased rapidly in numbers during the oil boom in Alberta and Saskatchewan during the period up to around 2015. Figure 11, which presents average weekly wages including overtime in the period since January 2001, illustrates the growth in construction wages relative to other industries until the latter months of 2017. The point to be made is that the rise and the fall in construction employment was, to a large extent, the main determinant of labour market trends in the province from 2000 onwards. Jobs in the oil and its other supporting industries have enjoyed positive, but more restrained growth and avoided the employment cycles. We have tried to make the case that governments since railway construction have understood the importance of jobs in this sector and have used government-backed infrastructure projects to provide good-paying employment especially when coupled with UI/EI benefits. These public projects provide benefits to workers and their families, to businesses who supply work and materials as well as sell goods and services to those workers, and to the public who make use of the infrastructure.
Figure 10
35 Paid Construction Monthly Employment In Newfoundland 25,000 and Labrador, 20,000 Jan. 2001 – May 2020
15,000
10,000
5,000
0 Jul-03 Jul-08 Jul-13 Jul-18 Jan-01 Jan-06 Jan-11 Jan-16 Sep-02 Sep-07 Sep-12 Sep-17 Nov-01 Nov-06 Nov-11 Nov-16 Mar-05 Mar-10 Mar-15 Mar-20 May-04 May-09 May-14 May-19 Source: Statistics Canada, Table 14-10-0223-01
Figure 11
Dollars Average Weekly Wages Including Overtime for NL Selected Industries, Monthly Seasonally 1800 Adjusted, Jan 2001 to May 2020.
1600
1400
1200
1000
800
600 Goods Construct Service Pub Admin 400
200
0 Jul-04 Jul-11 Jul-18 Jan-01 Jan-08 Jan-15 Jun-07 Jun-14 Oct-02 Oct-09 Oct-16 Apr-06 Apr-13 Apr-20 Feb-05 Sep-05 Feb-12 Sep-12 Feb-19 Sep-19 Dec-03 Dec-10 Dec-17 Aug-01 Aug-08 Aug-15 Nov-06 Nov-13 Mar-02 Mar-09 Mar-16 May-03 May-10 May-17
Source: Statistics Canada Table 1410022301
The Great Recession began in the United States in 2007 as a housing bubble but then led to financial collapses in many countries. The immediate impact for NL was a fall in oil prices as we saw in Figure 8. As oil exports fell, this resulted in a fall in our GDP as shown in Figure 6. This fall should have been expected. In the true economic sense, there was not a recession in Newfoundland and Labrador because there is no evidence of a general slowdown in economic activity. Notice that in Figure 6 final consumption expenditures seem even faster during the 2007-2012 period. In addition, looking at Figure 10 we observe construction employment
36 beginning to pick up and then accelerate during the period from late 2011 to mid-2013. The Vale Inco processing plant in Long Harbour began construction in April 2009 with production starting in July 2014. The Hebron GBS began construction around 2012 and finished in 2016 and then the Muskrat Falls electrical generating facility began construction in 2012. There were also numerous other smaller projects underway. Not only were there construction jobs available in the province but there was also a very strong demand for construction labourers and skilled trades persons in other provinces, especially in Western Canada and Alberta in particular, at least up until the oil collapse which started around mid-year 2014. The market for these workers could be considered a Canadian market. As we saw in Figure 11 above, wages in the construction industries grew rapidly and to a large extent they were set nationally and in a unionized environment. Around the end of this era (2014), there were a lot of workers in the industry being paid very good wages.
During the Great Depression in England a civil engineer noted that local engineering projects had a spillover economic impact on local communities. This indirect impact occurred because workers and their families spent the earned wages locally and this had an effect on the businesses and their workers where this money was spent. A famous British economist, Maynard Keynes, called these sequential impacts the “multiplier effect”. This effect could be applied to fiscal policy during a recession or depression in the sense that if the government spent money on investment projects this would have a multiplier effect on the economy and increase economic activity and therefore the overall level of economic well-being in society. This multiplier effect related to construction work was certainly prevalent in Newfoundland and Labrador especially in the smaller communities. Here workers who might have been involved in the fisheries could remain where they or their partners had grown up. Informal support was available and the costs of living were low. The wages would go further than in urban communities and besides the construction projects, such as Muskrat Falls, were not permanent jobs. The search for work was aided by being a member of a union and access to the internet. The search for work can now be done online. Reference to the 2016 Census illustrates the high prevalence of jobs in the construction occupations for males living in smaller communities.
For construction workers and their families, life in 2013-14 was good. If there was a downside for some of these workers and their families, it was probably that the workplace was often far from home and the rotation work periods at the sites might be quite long. Workers might be absent from their families for long periods of time. Dark clouds were beginning to gather with the collapse of oil prices and the realization that some of the large construction projects were coming to an end. For the older construction workers periods of boom and bust were part of the occupational lifecycle.
Economic Well-Being: The Best of Times
For the readers convenience, we are going to reintroduce Figure 5 discussed much earlier in this paper. The diagram shows some remarkable results. During the period from 1996 to 2002 the gap between real household disposable income per capita between Newfoundland and
37 Labrador and Nova Scotia began to close. The same observation can be made of the gap between the province and Canada. Around 2006, our relative position began to rapidly improve so that by the end of our era, 2014, we seem to be very slightly ahead of the Canadian average in this crude measure of the economic well-being of our residents.
Figure 5 Real Household Disposable Income Per Capita 30,000.0
25,000.0
Canada 20,000.0 Newfoundland and Labrador Nova Scotia 15,000.0
10,000.0
5,000.0
0.0 1949 1951 1953 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Source: Statistics Canada. Table 36-10-0229-01 Long-run provincial and territorial data
Figure 12 below reinforces our position below that GDP per capita is not a good measure of the economic well-being of the populace in those circumstances where a significant portion of the GDP includes exports and the capital and a significant part of the resource incomes arising from these exports flow to foreigners (investors who live outside jurisdiction). We also note that “final consumption expenditures per capita” from Figure 12 may be a better indicator of economic well-being than “real disposable income per capita” from Figure 5 since the former concept considers final expenditures by residents, governments and non-profit organizations.
38 This explains why final consumption expenditures for 2014 and beyond keeps going up while there is a dip in the real household disposable income per capita in 2015. Both concepts probably understate the relative economic well-being of Newfoundlanders and Labradorians compared to other parts of Canada by failing to consider the cost-of-living differences, household production, and household size. Consumption measures are a better measure of economic well-being but good data in this regard do not exist.
Figure 12 Economic Well-Being of NL’ers: 80000 GDP Per Capita or Final Consumption Expenditures per Capita? 70000
60000 FC/C GDP/C 50000
40000
30000
20000
10000
0 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Statistics Canada. Table 36-10-0222-01
The dramatic increase in our relative economic well-being is the amazing provincial story of the Canadian provinces in the 21st Century. We believe that the change was primarily the result of the oil resource boom and the economic developments which surrounded it.
2015-Present: Staying Afloat
39 In the Budget Speech of 2015, it was certainly recognized that there were major economic problems on the horizon for the province in general and for government itself. The provincial government was facing an expected deficit of 1.1 billion dollars; expenditures were almost 16% high than revenues. Not only had oil prices collapsed but so had the prices of other commodities, such as iron ore and nickel. The fiscal situation for the previous fiscal year was not that much better and at the end of April 2015, the deficit was predicted to be around $924 million.
Rather than concentrating on the short-term, the strategic management approach was to focus on the longer-term realizing that the economy was facing a period of contraction. To control the deficit government would allow attrition in the ranks of the civil service. It would also reduce infrastructure investments. Following the approach Norwegian government, the province would create a “Generations Fund”.
If the province’s fiscal deficit was a concern, it did not seem to be reflected in the public discussions during the election in the fall of 2015. For whatever reason, the Conservative Government was replaced by a Liberal one. The new government seemed to discover that the ongoing deficit for 2015-16 fiscal year was a major problem. The revised budget estimates for that fiscal year virtually doubled the previously estimated size of the deficit to around 2.2 billion dollars. A major source of forecasting the size of the deficit was on the revenue side where oil revenues were and are an important source of own source funds. As noted previously, staples such as oil are traded on world markets and experience great fluctuations in their price. With the price of oil, forecasting is particular difficult not only because of the challenges of estimating future demand and supply forces but also because of the strategic interventions of the OPEC cartel leader, Saudi Arabia. On the expenditure side of the budget, such expenditures could only be seen to be growing especially with the impact of an aging population on health care expenditures.
Given the magnitude of the deficit problem, in the 2016 Budget, the Minister of Finance took decisive action both on the revenue and expenditure side to correct the problem. It was generally acknowledged that expenditures were the primary problem. Evidence going back to 2001 was provided in the Budget Speech that expenditures per capita were 20-36% higher than the average in other provinces. This was actually a characteristic of budgets long before 2001, being the norm rather than the exception. The generally accepted explanation for this phenomenon was and still is that it costs more to deliver essential services to a population that is geographically widely dispersed into hundreds of small rural communities. This is a believable conjecture but there is no evidence to support this conjecture since other provinces also have areas in which the population is widely dispersed. An alternative conjecture might be that public sector jobs provided well-paying year-round employment especially in the rural areas of the province where similar jobs in the private sector where harder to come by. Providing provincial public sector employment then becomes a strategy for meeting one of the most significant challenges faced by the Commission of Government in the late 1940’s and all the provincial governments that have followed.
40 The response of the government relating to relative expenditure costs was to quietly plan in 2016 to severely reduce the size of the civil service in the 2017-2018 calendar years even though it was acknowledged that larger construction projects would be also winding down. The longer-term forecasts in the accompanying documents to the budget included a major and imminent reduction in employment levels coupled with unemployment levels reaching almost 20%. Just as quietly, the government appeared to plan, in 2017, to spread the reduction of employment over a longer period of time.
The finance minister resigned at the end of July 2017. Almost immediately, the tone of the government changed, agreeing to no mass layoffs over the remainder of the union contracts but there would be no increases in base salaries. While there was talk of attrition, as shown in Figure 13, there is no evidence in the payroll employment data that any attrition in provincial public sector jobs did occur. The perceived strategy adopted by the government was to “kick the can down the road”. The structural fiscal problems were not dealt with and the fiscal situation deteriorated. The status quo was maintained by borrowing.
Figure 13 GNL Public Sector Workers, NL, Seasonally Unadjusted, Jan. 2010 - May 2020 40,000
35,000 Health Care and Social Workers 30,000
25,000 Workers in Educational Institutions 20,000
15,000 Provincial Civil Servants 10,000
5,000
0 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18 Jan-19 May-19 Sep-19 Jan-20 May-20
Source: Statistics Canada Table 1210022301 using data from Gov't of N&L, Dep't of Finance
Presumably, the government was waiting for Ottawa to come to the rescue or for oil prices to rise to levels predicted earlier. Ottawa did come to the rescue with an Agreement on the Atlantic Accord which would provide a payout to the provincial government of about $160 million per year between 2019 and 2030.
41 It should also be noted that in the 2019 Budget Speech the Minister of Finance outlined a fairly ambitious infrastructure plan. The Minister stated “Our rolling five-year infrastructure plan from 2019-20 to 2023-24 totals $3 billion. This plan is helping to stimulate economic activity, create jobs, and provide access to modern facilities.” Construction activity deployed throughout the province is an integral and perpetual form of an economic development strategy as well as an important support to the labour market. While, as noted, the previous government had decided to somewhat curtail this investment, the recent government did not, even though many citizens were concerned about the growing public debt.
To observers such as ourselves, it seemed that the public concern was not so much about the growing debt or constant deficits as it was about the cost of Muskrat Falls and the implication for the future cost of electricity to your household. For most of us life seemed to carry on as normal. Inflation rates were low and so frozen salaries remained at basically constant levels once you had adjusted your consumption portfolio. In fact, consumable incomes may have increased. With increased federal transfers to the household and the provincial government’s reducing or eliminating some taxes and charges altered in the 2016 and 2017 provincial budgets.
The tranquility which we seemed to enjoy was thrown into disarray with the pandemic. The terms “self-isolation” and “social distancing” along with “working from home” became part of everyday speech. The future impacts from this pandemic are difficult to gage at this time. The current economic outcomes in Canada reflect the economic support that mainly the federal government and to a lesser extent the provinces have provided to families, workers and businesses. There seems to be some evidence that some families may be economically better off than before the pandemic. After the government support is withdrawn there will be a period of adjustment and probably downsizing. Unlike many economic recessions, this pandemic-led recession has accelerated changes in technology. For example, meetings can be held from workers’ homes and since travel time is not involved along with meeting expenses then costs are reduced. Productivity may also be increased as specialists can be involved in meetings without taking large amounts of time away from other duties.
It is clear that some industries are more affected than others. The airline industry is expected to experience long-term effects of decreased traffic. Of particular concern, should be the fall in oil prices. Coupled with the changes to greener technologies and the goal of net zero-emissions over the long-term, large international companies are changing their priorities. Some of these companies are involved in Newfoundland’s offshore industries and current developments and major refurbishings have been postponed. The major projects must be analyzed in a long-term time frame. What is clear is that under the current cost structure, oil prices must in general be greater than the $60-$80 range for a project to be economically viable. In the background are countries trying to obtain as high a price as possible before technological changes of a response to climate change cause decreases in the demand for oil and lower prices so as to strand existing deposits. Competitiveness implies providing the lowest unit cost for a good or service of a particular quality for stated attributes. Existence does not imply competitiveness; it is a necessary condition but not a sufficient one.
42
In an economy, cyclical changes are different than structural ones, that is, long-run fundamental changes built in to the fabric of the economy. Complicating matters are that the two types of changes can interact as was discussed above. There has been a tendency to describe our current economic problems as being primarily cyclical in nature and due to the pandemic. We would argue that there are serious underlying structural problems that have long-run fiscal implications. It should be noted that the policy responses to such economic conditions are vastly different.
Recently, there has been another change with the resignation of one premier and the selection of a new party leader. This new government has introduced a hold-the-line budget for this fiscal year. This strategy is probably more guided by political considerations than economic ones. The political considerations are complicated by governing in a minority government situation. The more important structural issue is the political typography and culture in which constituency self-interests dominate provincial ones. The direction of any fiscal adjustment must be negative resulting in a decrease in social and economic well-being for most individuals in the province. The negative impacts will not be uniformly spread amongst the residents. Those with fixed assets that are not easily moved will be more negatively affected. Those individuals who are younger and more highly educated/trained in sought-after occupations will be the least affected because they are the most mobile. Older individuals with more financial wealth and with family living outside the province are also mobile.
Holding the line on fiscal restructuring implies an implicit trade-off in which the structural deficit becomes greater and therefore more difficult to deal with. Waiting for a saviour or Godot likely increases the costs of adjustment. Ottawa providing one-time financial grants may relieve cash constraints and solve short-term political needs but does not solve the fundamental structural problem which is a key driver of deficits being experienced.
Our next paper provides a menu of possible fiscal solutions to our fiscal problems but since any solution to a debt problem necessarily involves a reduction in living standards then we have a political problem in trying to get voters to accept any reduction. Managing a transition. “Ay, there’s the rub.” Hamlet
The Transition Summary
In summary, the Newfoundland and Labrador economy has gone through a remarkable period of economic transformation since confederation with Canada. We have gone from relatively low levels of disposable income to reach the Canadian average and possibly beyond when one considers the cost of living in acquiring such household assets as housing, the role of household production and the cash economy, particularly in the more remote rural areas of our province. Like other industrialized economies, our labour markets have transformed from being employed in goods producing industries to the service producing ones. Those jobs associated
43 with the public sector industries have played a particularly important role in community sustainability beyond the capital region.
Some Summary Points
• The traditional fishery had resulted in the settling well over a thousand small communities scattered along the province’s shoreline. Many of these communities still exist but with smaller and older populations. Many of these communities are becoming summer residences with many inhabitants coming from outside the province. Their year-round survival of many of them remains to be seen.
• The provincial government has been trying to provide the level and quality of essential public services to these hundreds of rural communities using traditional methods often involving expensive fixed assets. This has resulted in a structural fiscal imbalance with expenditures greater than revenues. Whether these methods are the most efficient or effective requires evaluation. However, essential provincial public expenditures in the rural areas have been a keystone in sustainable economic development in regions since the expenditures have been associated with well-paying, year-round jobs. What is their primary purpose of the delivery of these essential services? Is it the level and quality of care of these services or is it the provision of well-paying local jobs?
• Urbanization has been occurring and will accelerate. However, the province is still the most rural population-based province in the country.
• In spite of growing urbanization, the balance of political power is still centered in the rural areas. The focus of voters in these areas are on local rather than provincial-wide interests. This political reality has increased the delivery of essential public services such as health care and education in these rural areas of the province. Such delivery has often required bricks and mortar infrastructure. Wage rates associated with these services have been more in line with the Canadian average and above those paid in the Maritime provinces. The results of the two observations above are higher public- expenditure costs per 1,000 population.
• The movement of workers out of processing and fishing jobs into higher paying and often higher skilled construction occupations has been a continuing feature of the labour market transition process. At the present time there are many workers in the construction sector who have become unemployed. There currently appears to be an excess capacity and growing structural unemployment with downward wage-rigidity.
• While there have been almost constant calls for industrial diversification, it seems that only business developments that were associated with our natural resources and therefore have aligned with our comparative economic advantage, have been successful for extended periods of time.
44 • Government assistance to declining industries may temporarily stall the transition process but does not halt it. In some cases, such as the inshore fisheries, the eventual adjustment was more severe and costly to all concerned.
• UI/EI have supported part-year employment particularly in the rural areas where household production coupled with access to natural resources have allowed families to have an acceptable standard of living when coupled with other transfers such Canada Child Benefits. While some observers have decried this transfer dependency, our position is that it has permitted households to maximize their economic and social well- being given the parameters of the transfer systems. From the rural community perspective of its workers, its households, its employers, its local businesses and its local politicians seemed to have won.
• If there exists a transfer dependency and perception of entitlement in the province, it may exist at the provincial level. We do not have the welfare state but instead the state on welfare.
• The hope by the Commission of Government for Newfoundland and Labrador being self- supporting has only existed in the seven years of abundance from 2006-13 when high revenues occurred as a result of very high oil prices.
• Although the oil industry has seemed very profitable, its economic profits (which include an acceptable rate of return on investment) have not been that large with the exception of the years from 2006-13. Large resource rents, such as those experienced in the “years of abundance”, are the exception rather than the rule. There has been a crude trade-off by governments in terms of resource rents versus jobs.
• The average standard of living in Newfoundland and Labrador has increased to match that of the rest of Canada and perhaps the United States. It had surpassed the standard in the rest of Canada. The true relative comparisons are not possible given a lack of data on consumption and the differences in living costs; the Market Basket Measure of poverty provides some evidence of cost differentials at the poverty line.
• The degree of income inequality in the province is less than in Canada generally and far less than in the United States or the UK.
• Over our transition period, local merchants have often been replaced by large foreign international corporations both in natural resource production and the provision of the consumer goods and services in the private sector. In some respects, this process has left attributes of “mercantile colonialism”.
• The province’s goods producing sector is still primarily based on natural-resource development and production but diversifying away from the fishery and forestry and into oil, mining, and hydro-electric generation. Although the natural resources are owned by the province the focus has been on well-paying jobs capable of providing a good standard of living rather than economic rents.
45 • Attempts by the provincial government to diversify the private sector of the economy in order to move workers away from a declining small-boat fishery and provide good- paying jobs have by-in-large failed. The one exception may be jobs in the construction industry and these jobs have often been associated with government infrastructure investments. While stories of successes may exist data-based evidence does not.
• Government aid to industry has often been targeted at stalling the forces leading to structural change rather than allowing the natural forces of development to prevail.
• Newfoundland being an island and Labrador being somewhat isolated have shaped our social and economic perspectives on the world around us. The separation has made us aware of our cultural traditions. The remoteness and separation of our communities has perhaps made us aware of the importance of family and communities.
• Demographically, NL has gone from one of the highest birth rates in the world to one of the lowest. The result is a natural decline in the population. Given our demographic profile with a concentration of boomers in retirement, the population of the province will decline as will the province’s revenues.
• While education levels of our younger population have risen remarkably over the last 70 years, many individuals in this group have left the Province in order to be able to take jobs that fully utilize the knowledge and skills they have obtained. Indeed, these individuals are our most mobile. Controversially, one might argue that our most valuable export has been our people.
• Culturally remarkable changes have included the movement away from organized religion, large families and community inter-dependence to smaller households in which both partners are employed.
• Although diminished, the perspective of the population is still influenced by living on an island with a somewhat separate culture. However, the younger population are losing the unique cultural identity for one that is more North American and perhaps more specifically Canadian.
• Consistent with economic theory (read Steven Levitt’s book, Freakonomics), economic self-interest explains a large part of individual and group behaviour.
NL’s Economic Future (A Very Short Subjective Version):
There are a couple of observations that should guide subjective estimates of future economic events during this pandemic. Firstly, the past is not necessarily a good guide to the future levels of economic activity. Secondly, not all time periods are characterized by the same level of economic uncertainty. Thirdly, some extraordinary events such as wars or pandemics can speed up the rate of technological change, often in areas of the economy that have nothing directly to
46 do with the pandemic. With these caveats in mind, our predictions for the medium term and longer-term follow.
A non-economic prediction with economic consequences relates to demographic changes. We can assume that over the next 20 years, the population of NL will decline and rapidly in the rural remote areas. We could compare this phenomenon to a glacial melt with our urban areas being the last places to lose population. This decline is due a large portion of the population in these areas being over 60 as is demonstrated in the population pyramid shown below in Figure 14. Figure 15 provides some insight as to how the pyramid might be changing from year to year. The trend lines births and deaths should change their slopes over the 30 years. Both will become steeper. The yellow line will become steeper as more younger women migrate and those who remain have fewer children. The current fertility rate is perhaps the lowest in the country. Deaths will become steeper as more boomers go into older age and die. Both lines will probably go off course until 2022 due to the pandemic. There will be fewer births and perhaps more deaths. International migration might alter this picture slightly but not fundamentally in the medium term. There is really no good news in this picture.
Younger more Figure 14
Source: Statistics Canada, Census and NLSA, GNL
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Figure 15
Source: Statistics Canada, Census and NLSA’s Community Accounts, GNL’s
We have not discussed the outmigration rates of our current workers or of our recent graduates which will probably increase, perhaps substantially, over the next couple of years. As we have observed in Figure 10, the increase in the number of construction workers has played a major role in the labour market transition story for virtually the entire transition period that we have been examining. For these later workers, there was an abundance of work in very high-paying jobs both at home and in provinces such as Alberta. However, the dramatic decline in oil prices is affecting the number of workers required by that province in the oil sector. Moreover, Alberta is actively promoting the hiring of Alberta workers before bringing workers from other provinces. This traditional labour market for our provincial workers is in decline. Closer to home, larger projects, such as Muskrat Falls, are winding down or will be completed
48 within 2 years. Other projects such as the White Rose extension or Hibernia drilling are on hold. A few public sector construction projects that remain will provide some employment opportunities over the next couple of years.
While there are oil discoveries, they may not be viable to develop at the current price of $43 USD/bbl for Brent oil. As noted elsewhere, the price of oil needed for new fields would be in the range of $80 USD/ bbl. The future for such developments is therefore highly uncertain at this time. Growing environmental concerns coupled with a rapidly changing technology make substitute alternatives increasingly attractive. There are other concerns associated with doing construction work locally when it might be done elsewhere. Firstly, there are anecdotes that our workers have low productivity levels when engaged in large oil-related construction projects. Whether or not this productivity story is a fact cannot be independently verified at this time. There is a separate problem and that is a downward wage rigidity as prices fall. Unionized workers naturally will resist any reduction in wage rates as demand for their services decline even though such a decline could lead to greater employment opportunities. An adjustment will occur but the period of adjustment will simply be longer.
Work for construction workers may be available but it may require looking to outside labour markets such as those in urban Ontario labour markets. It is likely that the adjustment process will lead to permanent outmigration rather than mobile work. The bottom line for construction jobs is that the number and availability within the province or the traditional Alberta market will decline.
It is also quite likely that the number of public sector jobs will also decline. We argue in the next paper that these declines should bring the numbers of public sector workers down to levels per 1000 population consistent with that of New Brunswick or Nova Scotia. This transition to lower numbers will be made easier by the relatively large number of retirements and low number of new entrants. As was illustrated in Figure 13, attrition as touted by the Ball government did not occur; the fall in the number of workers in education and health care can be attributed to adjustments in the COVID-19 pandemic.
Structural adjustments which might affect the Canadian and NL economies are the changing nature of world trade with China. These changes have been initiated by the U.S. government but additionally relations between China and Canada have deteriorated substantially and this might affect some of the exports from NL.
Other structural adjustments might flow out of the major economic downturn caused by COVID-19. Whether this is a very severe recession or a depression remains to be seen. The initial impacts on the NL economy are somewhat similar to the impacts felt elsewhere. The food and bar services industry has been hit very hard as has tourism and the airline industry. Other industries such as post-secondary education have also been hit hard with a loss of non-resident students and the move to online courses. It is too early to predict structural changes which may occur in various industries and occupations but survival will mean cutting costs. Only the larger international companies are likely to survive. Smaller and medium-sized local enterprises will
49 have a much harder time surviving. Most analysts have noted that recessions last a fairly short period of time. Our own observation is that the adjustment period may be fairly long although 70-80% of the adjustment may be over by late 2022.
The bottom line is that the population of NL will likely continue to decline. As noted earlier this decline is likely to be most severely felt in the rural remote regions of the Island. The Avalon Peninsula particularly in the Conception Bay and Placentia Bay regions could well be an exception if people can work from home and there is a relatively short commuting- time of an hour or so from St. John’s. Figures 4 and 6 illustrate that a fall in population did not result in a decline in GDP. The fall in population also did not reduce the level of individual final consumption expenditures. Individual EWB may fall but this is due to a falling employed population, primarily due to retirements. It should also be noted that Economic Well-Being is not the most important factor in determining our overall level of well-being. In the longer term, with consideration to income inequality, general fairness, inclusiveness, and consistent with the past future generations have the opportunity of being better off than our current generation, which is doing very well indeed, by relative world standards.
The fiscal implications of a declining population and a declining labour force are that personal income taxes as a source of provincial will decrease as will HST. Some businesses, particularly in the areas outside the St. John’s metropolitan area, may go out of business resulting in a decline in corporate income taxes and self-employment incomes. Oil prices are expected to be well below historic highs for the foreseeable future and therefore will not be our fiscal saviour. Oil royalties can be thought of as helping to pay charges related to our gross debt. Will we become an equalization receiving province within the next 5 years? One would believe that the probability of being in this position is subjectively about 75%.
The fiscal saviour is hoped by the province to be the federal government. Major one-time transfers to the provincial government may solve a political problem but it will not solve our chronic structural fiscal problem!
Fiscal Sustainability Paper
In our next paper, we show that we have a long-term and growing fiscal deficit problem. This problem is primarily structural in nature. However, during this pandemic the deficit problem has a strong cyclical component to it. Our understanding was that in order to deal with structural change one must understand the cultural, social, political, demographic, geographic and natural resource characteristics of Newfoundland and Labrador. How we are transitioning in those domains is essential to our understanding. The key here to this integrated approach may be that it aids us in understanding hidden trade-offs and constraints. In addition, examining past programs and policies will assist us in understanding what works and does not work.
50 The underlying theme of what follows in the next paper is that the economic solutions to our fiscal problems may not be that difficult since some fiscal guidelines and guarantees lie in the Canadian constitution. The main barriers to transition are political. However, it may be that in the medium-term we may have to transition through some lower level of economic well-being, that is, in our standard of living. Given the manner in which societies are currently transitioning through the pandemic, there is, we believe, the real possibility, that we can change paradigms and deliver government services in innovative and therefore, in more productive ways. If our beliefs are correct then our Social Well-Being may actually go up. Our prognosis is that in the long run, our Economic Well-Being could well increase and our Social Well-Being will be amongst the highest in the world.
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