Export-led Growth: Reviving BC's Lagging Performance

Archived Topic Box from the 2002 Second Annual Benchmark Report

The per capita GDP growth numbers for the last three decades make BC's poor relative economic performance abundantly clear. There are three or more years of growth rates below the Canadian average for every year we have grown faster than Canada. Any noticeable change in the long-term position of British Columbia is going to require an alignment of critical factors for economic growth well beyond what we might hope for within the usual ups and downs of the business cycle. A comparison with other economic jurisdictions that have turned the corner after lengthy secular decline shows that one potentially positive path to prosperity is to pay attention to exports. Could a refocusing on exports be an element in turning around a decline which is not just the result of a recent string of unfortunate circumstances?

Examples abound of sustained export-led economic progress. As well as the Asian tigers including Taiwan, South Korea, Hong Kong and Singapore, which have had average growth rates over sustained periods that are more than twice what we would consider normal, we have more recent examples such as Ireland. An important part of the success of China is also an export-based strategy, and many smaller eastern European states have revived their economies by realizing the importance of exports. More generally, the experience of successive expansions of the European Union is that economic progress has come with expanded trade, and few today would question the beneficial effects of the FTA and NAFTA for Canada as a whole.

In many ways, export success requires the same critical factors as those laid out in the Progress Board's initial benchmarking report: the necessary conditions, growth agents and enabling strategies (see Appendix D). For example, we need efficient transportation systems, competitive taxes, improved infrastructure and less onerous regulation. However, viewing exports as the growth driver directs attention to particular factors that are critical for British Columbia, a small resource-based open economy that is poorly diversified in production and markets.

The principle of comparative advantage, which is traditionally used to demonstrate the gains from trade, requires that countries specialize in products for which they have lower opportunity costs than their trading partners. The pursuit of comparative advantage means allowing some industries to expand while others shrink and possibly disappear. This means that while there is a gain in well-being on average over the years, there is also possibly more volatility in income. Volatility is driven by variations in terms of trade - prices of exports versus imports - and market conditions. That is, there is a potential trade-off from increased trade between mean income and volatility of income. The volatility in turn depends on the correlation between the sectors that thrive with trade. What are needed, therefore, for sustained, steady growth are industries that have low correlation, so rather than having a variety of resource industries, it is better to have a combination of service sector industries such as travel and bio-technology, alongside resource industries.

Recognition of the value of a diversified export-oriented economy does not imply policies aimed at diversification. Such policies rarely if ever work. Rather, it means that when reviewing the critical factors and enabling strategies, consideration is given to decisions that help broaden the range of economic activity. For example, education that is likely to support knowledge-based industries, especially higher education, might be chosen over improving transport links to resources when, as is often the case, difficult choices are being made over the allocation of public spending. The issue should be familiar to anyone who has considered the importance of diversification in their personal investments: we want our eggs in a variety of baskets that are not likely to be all dropped at the same time!

Further aspects of an export-led reversal in BC's sagging economy of the last several decades are highlighted by the more eclectic theory of economic success that has been articulated by Michael Porter, namely, his principle of competitive advantage, which is not to be confused with the much older principle of comparative advantage. There are four main elements to this principle: good strategies and rivalry between competing firms, highly discriminating domestic consumers who force local suppliers to be world class, existence of the necessary "clusters" of related and supporting industries, and good endowments: this last item is, of course, the sole focus of comparative advantage. Being small, BC does not have the necessary range of competing firms needed to become internationally competitive, and we also lack large groups of discriminating buyers and the essential clusters of related and supporting industries: we are not positioned as well as, for example, Ontario or Quebec, in terms of the conditions for achieving competitive advantage in the global marketplace.

What is suggested by considering Porter's arguments is that an export-led reversal of our decades of relative decline will depend on activities where our specific disadvantages are small. For example, we would do better with services that are less affected by the absence of a cluster of related and supportive industries, since alliances are easily made when transportation and communication costs are not an issue: it can be almost as cheap today to call Asia or Europe as another town in British Columbia. Also, access to dispersed discriminating consumers is relatively easy with services, thereby enabling firms to keep ahead through trying to satisfy these consumers. Most international trade in services is based on knowledge, and so again, education is highlighted. Ireland is a contemporary example of how an educated workforce can be a critical factor for reversing economic trends: after suffering decades of decline, Ireland reversed its prosperity with a policy based on excellent higher education, along with competitive corporate and individual tax rates and an encouraging regulatory environment.

Diversity is required not only in what we have to sell, but also in where we sell it. While it is only natural that we would sell a substantial fraction of our exports to the United States, having a dominant buyer makes us vulnerable to the idiosyncrasies of the fortunes of that buyer, and the policies that buyer might select. Consequently, when it comes to considering critical growth factors such as transportation and achieving market access, the achievement of more diversified markets that are not highly correlated should also be a focus: we benefit from more diversified economic activity at home and more diversified markets abroad. This will, of course, involve the Federal Government which is responsible for international trade. All parties need to understand that a portfolio of industries and markets is less volatile than single industries and markets. Sellers also have more power when dealing with a buyer that lacks monopsony power - the power held by a single buyer.

Resource exports will, of course, always be essential to our well-being, especially in smaller towns and communities in so-called "Region 250" (i.e. outside of the Lower Mainland). So too will be the processing of natural resources. However, we live in a world in which more and more value-adding activity comes from services: services are approximately 70 percent of the US and Canadian economies, and the fastest growing component in world trade. There are ways in which we can help British Columbians participate in the new growth areas. An export-based strategy should be part of any overall plan. It is possible to reverse the trend of relative decline. The answer lies in the world outside British Columbia and Canada.

Source: Maurice Levi, Bank of Montreal Professor of International Finance, University of British Columbia.