DRAFT ONLY DO NOT QUOTE or CITE [Paper prepared for: Manitoba Politics, Government and Policy into the 21st Century. Roblin Professorship Conference, St. John’s College, University of Manitoba, Nov. 20-22, 2008] Manitoba in the Middle: A Mutual Fund Balanced for Steady Income Derek Hum and Wayne Simpson Department of Economics University of Manitoba We dedicate this essay to our longtime colleague, Paul Phillips (1938-2008), who maintained a steadfast interest in the staples approach to Canadian economic history as well as the Manitoban economy. 1 DRAFT ONLY Manitoba in the Middle: A Mutual Fund Balanced for Steady Income Introduction Canada is a country with immense natural resources. Much of its early history in nation building can be viewed as securing and extending the “commons”, and establishing the necessary infrastructure to accommodate “staples development”. Indeed, the iconic image of the Canadian railway is bound up with immigration and raw materials. Canada has always taken its resource wealth for granted --- an attitude that still shapes our cultural identity and self- image of our nation’s proper work. However, “peace, order and good government” is not enough to guarantee prosperity, and each successive generation must manage its economy to put bread on the table, produce electricity for our microwaves, fabricate bus coaches for public transport, and provide health care and education for our children. Manitoba is a small part of the Canadian economy, a smaller portion still of North America, and a miniscule fraction of the global economy. The material prosperity of Manitoba, like every other small and open economy, is consequently tied to its size, location, resources, and of course, the talents of its people. This essay concerns Manitoba’s recent performance and future prospects rather than a recounting of its historical fortunes. In other words, details outside Manitoba are extremely abbreviated, and Manitoba’s economic past is painted with very broad strokes. The central theme, however, can be briefly stated as follows. Manitoba is sheltered from the extremes of most volatile economic 2 cycles, neither suffering wholesale industrial decline nor enjoying exuberant heady booms. This has been characteristic of its post war past, and will likely be its foreseeable future, arising from matters of geography, size and natural endowments. These factors will likely trump any and all feasible short-term government attempts at “forced growth” type policies. Manitoba should therefore adopt a long-term vision of its place, display quiet patience and maintain a realistic demeanor when contemplating its economic aspirations. How did the Manitoba economy arrive at this state of affairs? Manitoba’s staple past: A missing Heritage Minute An economy’s structure cannot escape its past. For this reason alone, some sense of history --- however revisionist - --- is required to place Manitoba’s present circumstances in perspective. But where to start? We arbitrarily begin with the wheat economy.1 In 1870, agriculture was the largest sector in all of Canada, accounting for more than 40% of GDP (manufacturing only accounted for 22%). But from that point forward, it continuously declined. The Prairie wheat boom is probably the most dramatic, and most studied, of economic developments in Canadian history, and Manitoba was at its very centre. Further, the wheat economy exemplifies the “staples theory of growth”, often suggested as the single uniquely Canadian contribution to economic understanding.2 1 It is also well known that the fur trade played a pivotal role in the economic development of the west, particularly Manitoba. We will start the story after increased immigration and completion of the transcontinental railway in 1885 allowed wheat to displace furs as the dominant staple. 2 For more details on Canada’s economic history during this period, see Norrie, Kenneth and Douglas Owram, A History of the Canadian Economy. Toronto: Harcourt Brace Jovanovich. 1991 3 The staples approach is variously interpreted as a growth model or a regional development model. It is also a useful schema for untangling the complexities of metropolis- hinterland; namely, a hierarchical conception of economic functions distinguished by industrial activity (manufacturing or staple production) or location (urban centre or periphery). Manitoba --- a province with Winnipeg as its sole, large city --- is tailored made for application. In brief, the staples approach gives importance to staples production (in Manitoba’s case, wheat). Domestic consumption of the staple is negligible so the staple is primarily sold in international markets at terms of trade dictated by external demand. The production of the staple for export, in turn, influences the entire structure of the domestic economy through its various “backward” and “forward” linkages in the form of transportation networks, service provision and any ancillary inputs required to accommodate staples product for an export market.3 Hum and Phillips demonstrate mathematically that a staple producing region’s growth rate depends on a weighted average of the growth rates of the staple and non- staple sectors. Consequently, with the continuous decline of wheat as an important staple, and absent the emergence of another staple (such as oil or potash), Manitoba’s decline from the heady days of the wheat boom was inevitable. Today, agriculture in Manitoba accounts for less than 5% of GDP; realized net farm income is a meager $25 3 The staples approach is mainly the preserve of economic historians. However, Hum and Phillips provide a general mathematical formalization of the staples model based upon two key assumptions: (1) domestic consumption of the staple export is “small” relative to total production, and (2) propensity to produce the exportable staple is “large” relative to total output. With these assumptions they are able to derive a number of mathematical results respecting regional growth rates and the like. See Derek Hum and Paul Phillips. “Growth, trade, and urban development of Staple Regions” Urban History Review 10(2) 1981:13- 23. 4 million, and the value of wheat production in Manitoba has even lost its first-place ranking to Canola.4 The outbreak of WW1, the Great Depression, and post WW2 experience are also chapters that need examining in chronicling Manitoba’s economic development, but we leave that for others.5 Our purpose here is simply to “locate” the benchmark of the staple economy for Manitoba, and note its high point. At the turn of the century, Canada was a major player in the wheat market, and as Norrie and Owram note: “… in 1909, Winnipeg handled more wheat than any other centre in the world.”6 If Manitoba is no longer a province of agricultural workers, how should it be viewed today? It is fair to say its work force is slow-growing but mostly fully employed, with labour force participation rates (c. 79%) above the Canadian average. However, Manitoba’s net population loss is sizable (8600 persons in 2006) and has increased of late. Immigration to Manitoba has also increased slightly, with over 10000 persons entering Manitoba in 2006. Given low birth and fertility rates for all of Canada, Manitoba’s labour force growth is heavily reliant on immigrants for its meager growth, since Manitobans have never been reluctant to leave the provinces for opportunities elsewhere. The rising net outflow of workers to Alberta is a mere reprogramming of the GPS (Global Positioning Satellite) for Manitobans, giving directions to “Go West!” rather than “Go East!”, particularly 4 Baragar, Fletcher. (2007) Report on the Manitoba Economy: 2007. Canadian Centre for Policy Alternatives-Manitoba 2007:20-22. 5 For a capsule treatment of Manitoba, see Benarroch, Michael “Economy of Manitoba” in Encyclopedia of Manitoba. Winnipeg: Great Plains Publications 2007:187-92. See Norrie and Orwam, A History of the Canadian Economy for a general economic history of Canada. For a book length examination of Winnipeg’s economic history, see Bellan, Ruben. Winnipeg First Century; An Economic History. Winnipeg: Queenston House 1978. See also Hum, Derek, Frank Strain and Michelle Strain “Fiscal Imbalance and Winnipeg: A Century of Response” Urban History Review. 15(2) 1986. 6 Norrie and Orwan, A History of the Canadian Economy 1991:321. 5 since Manitoba’s wages tend to be below the Canadian average. Plus ca change, plus c’est la meme chose. What can the staples approach tell us? Manitoba, once the centre of a dominant staple to the world economy, eventually became a more subdued hinterland to an Ontario-centered industrial and manufacturing enterprise, mainly by reason of geography and population size, and perhaps even “National Policy”. But now, it finds itself cast again in the same handmaiden role to Alberta’s oil- generated economic expansion and British Columbia’s Far East linkages. But is Manitoba’s destiny determined entirely by “place”? Cannot Manitobans affect its economy through purposeful action with a combination of individual resolve and public policy? Manitoba’s economy: characteristics and structure Manitoba’s present day economy is unrecognizable against the heady days of the wheat boom. We can glimpse its present day structure through a recent report that details its features.7 Manitoba’s 2006 GDP (in real terms, 1997 dollars) was $37.1 billion, and has been growing at about its long term historical rate of 2.2% since 1981. The Canadian rate is about 2.7% between 1981-2004. In terms of the standard categories customarily employed by economists, consumption expenditures by households comprise about 60%, business non-residential investment is about 15%, and government expenditures about 25%. These proportions are not unusual. But focus now on how much Manitoba presently relies on the kindness of strangers. Exports from Manitoba in 2006 was valued at $23 billion, and about evenly split between exports to other countries and exports to other provinces. 7 Baragar. Report on the Manitoba Economy: 2007 6 Imports typically exceed exports for Manitoba and reached $26 billion in the same year.