Lessons for Canada from Nova Scotia’s Experience
by Bernie Miller
Introduction: Volkswagen and Canada’s Ambition for Leadership in the Green Economy
Imagine it is late 2027 and the Volkswagen plant in St. Thomas, Ontario, funded with a $16B federal subsidy, is ready to go into production.
There is a grand ceremony. Dr. Oliver Blume, Chairman of the Board of Management of Volkswagen AG addresses the assembly of the great and the near great. He looks over to the beaming Prime Minister of Canada and says:
Let me then, on this occasion offer a pledge to the Prime Minister. A pledge he can hold in trust for the people of Canada.
Sir, we shall not let you down!
We shall be in the forefront of the green industrial revolution.
We shall be in the vanguard of your drive to place Canada in the mainstream of the world’s economic life.
Prolonged applause ensues.
The Government of Canada brought this all about through a $16B subsidy package which forced growth in the Electric Vehicle sector in Canada by paying Volkswagen to locate in Canada.
Should we be wary of the perils of forced growth?
This very speech (with appropriate changes to geographic references and insertion of the word “green”) was given by the great Canadian, Peter Munk in Stellarton, Nova Scotia on the occasion of the opening of the Clairtone factory during the summer of 1966. It was the first step in industrializing Nova Scotia for the modern economy. Five years later, Clairtone was bankrupt, and the Government of Nova Scotia had lost $26M.
But, but, but… [federal politicians, officials, and other dreamers are saying] that was one unique and unusual circumstance and anyway, those workers in Stellarton knew nothing about manufacturing stereos.
Well, what about Volvo? By now, most people have forgotten there was a Volvo assembly plant in Nova Scotia for 33 years, between 1965 and 1998. It was to be Nova Scotia’s pathway into the growing automobile industry. Attracted and maintained with significant public funding, one analyst wrote:
The company took advantage of a weakened economic jurisdiction and lower labour costs, and gained the benefit of preferential treatment in tariff, capital, and infrastructure policies from the federal and provincial governments – all in exchange for the promise of booming employment and increased industrial development. But that promise never materialized. Volvo never employed more than 200 people directly in its plant … resulted in few secondary jobs … produced barely 10,000 vehicles in an average year … [it] did not, in the end, have a lasting effect.
Canada is to its OECD peers what Nova Scotia was to Canada between the 1960s and 2014: a lagging economy.
When an economy is lagging, governments tend to intervene to try to force growth through “silver bullet” solutions: words like “supercharge”, “kickstart”, or the more benign “incentivize” get used as adjectives before “economic growth”.
Political leaders perceive that if they can “incentivize” one big global player to set up shop with a mega project in their jurisdiction, prosperity will ensue. The bigger the gap between economic performance and possibilities, the more the government will assume the responsibility for economic growth and intervene to promote growth.
If the government intervenes inefficiently, it is more likely to retard rather than enhance growth.
With one notable exception, this was the experience of Nova Scotia’s economic development policies from the early 1960’s until 2014. If the measure of success was reducing regional economic disparity, the effort of forced growth in Nova Scotia failed without question. By the time the Ivany Report proclaimed Nova Scotia was on the brink of economic collapse in 2014, Nova Scotia and New Brunswick had, for well over a decade, been the perennial first and second prize winners in the annual Canadian Economy ugly dog show.
Are there lessons for Canada from Nova Scotia’s experience with “forced growth”?
You be the judge.
Part 1. Nova Scotia’s Industrialization by Invitation policy: “The money of the King brings bad luck to those who receive loans or advances.”
In the 1960s, the disparities between the Atlantic Provinces and Central Canada in income levels, employment opportunities, and state dependency became a situation of national concern – particularly the social and political implications. Relative to the rest of Canada, the Atlantic provinces were all on the decline compared to their 1890 post confederation peaks.
Trudeau, the Elder, observed:
“If the underdevelopment of the Maritimes is not corrected – not by charity or subsidies, but by helping them become areas of economic growth – the unity of the country is almost as surely destroyed as it would be by French-English confrontation.”
The perceived solution was government incented forced growth through “Industrialization by invitation”— massive public subsidies to manufacturers.
On November 20, 1956, the Conservative Party had achieved power on a platform of “road building and industrial development.”
In the 1960s, G.I. Smith and Robert Stanfield set out to end regional disparity through government policy and program initiatives, primarily directed at attracting industry to locate in Nova Scotia with substantial public funding, tax breaks and similar inducements. The perceived need was urgent. Between 1961 and 1966, well over 20,000 Nova Scotians left Nova Scotia for jobs outside the province.
The “industrial development plank” of the Conservative platform was a concept first advanced by Ike Smith during a meeting of Conservative candidates in 1956. He suggested Nova Scotia should set up a public corporation to assist industry in locating in the province. He believed industrial development would not come to Nova Scotia unless there were attractive incentives for it to do so, ranging from subsidies, a reliable workforce and infrastructure to tax concessions.
The idea of investing public capital for private interests was seized upon by Nova Scotia businessman Frank Sobey, an influential ally of the Progressive Conservative government. He favoured more active distribution of public money for private growth. Describing low levels of government financing of private industry in the era he wrote, “This province had a Department of Industry, which operated an Industrial Loan Act and an Industrial Expansion Act, but they were not actively promoted. “
He welcomed the idea of taxpayers providing low-cost, patient capital to businesses. The theory – and reality – was industry and enterprise at the time was highly capital-intensive.
It was perceived by Sobey and others that central Canadian banks (many of which started as Nova Scotia headquartered banks) were reluctant to loan for capital investment in Nova Scotia, so government should step in and play the role of “banker,” at least for attracting large capital-intensive business. (Banks would then gladly become the lower risk “operational lenders”, financing inventory and accounts receivables). This would be of advantage to large industrialists as, once they would have a financial partnership with government, they could have much greater influence in government decision-making.
Whereas a bank would make decisions primarily on economic factors and financial risks, once businesses were financially backed by governments, decisions would not only be financial, but also political and social. This would make government a “patient lender” and not hold businesses to the same level of financial rigour as normal financial markets would. From business’s point of view, a “win-win”, money without financial accountability.
With the support of the private sector in Nova Scotia, the Progressive Conservatives adopted an industrial development program using financial incentives as their leading platform commitment in the 1956 campaign.
The entire policy was predicated on an assumption that Nova Scotia could not succeed only on its comparative advantages and that businesses would not, as Ike Smith observed, “settle in Nova Scotia without some [form] of public financial encouragement.” The key element was to set up a Crown corporation to implement the program.
Robert Stanfield shared the same view and liked the idea of creating a Crown-controlled industrial development agency.
The Conservatives promised to create the Nova Scotia Industrial Development Corporation to be “operated, not by government, but an independent board of prominent Nova Scotia business leaders.”
The idea was the corporation would be initially subsidized by the provincial treasury but would also be financed by the sale to the public of shares in the corporation, a public/private partnership before that term was popularized.
Once elected, the Stanfield Progressive Conservative government struggled with implementation. Beyond the issue of selling public shares (for which there was little interest), government also started to become concerned about its level of control and contradictory priorities that could arise between the government and the corporation.
Convening Cabinet at the Lord Nelson Hotel at secret, in camera meetings to consider these challenges – the Conservatives were tampering with their main platform commitment and wanted to avoid any suggestion they were reneging on the promise or look disorganized—they changed the plan.
Sobey participated in the meetings and G.I. Smith and Stanfield eventually modified the idea and developed the concept of an “Industrial Estates” model rather than what was originally planned, which would have seen the development corporation owned by private investors who would share the risk and reward. This was a significant shift, placing all the financial risks of industrial development squarely on the taxpayers alone.
The new, cobbled-together concept of “Industrial Estates” was borrowed from models from late-nineteenth-century Europe and the United States. The usual objectives of Industrial Estates corporations were to encourage local development, to assemble real estate, improve tracts of land, and often erect factories or other capital assets for sale, or lease to industrial firms – essentially, industrial parks.
Industrial Estates programs involved extensive public capital investment over an extended period. As private lenders were generally reluctant to tie up capital and bear increased risk of failure, this risk was shifted to the public. The intent was “Industrial Estates” would play a formative role in attracting industry to underdeveloped, depressed areas.
After commissioning a report from the Chairman of the North-Eastern Trading Estate (NETE) in England, who conducted a feasibility study, the Stanfield Government formed Industrial Estates Ltd. in May 1958.
The initial plan was simple. The government would loan Industrial Estates Ltd. $12 million. Frank Sobey, as president, would determine how to use it and he would use his “skill as a businessman” to ensure all of the investments were good ones. Theoretically, the role of the government was to terminate after the initial $12 million loan was made to Industrial Estates Ltd.
The Government made an agreement with Industrial Estates Ltd. (the “Principal Agreement”) and committed, “…that it will permit the Company to operate as an autonomous corporation, free from control by, or interference from, the Province, so long as the Company adheres to the General Policy Provisions in the [Principal] Agreement.”
The mandate of Industrial Estates Ltd. was broad, with a strong hint of desperation. Its purpose was to encourage secondary industry to locate in Nova Scotia by assuming many of the costs such as land, buildings, and equipment, and then leasing facilities back to the enterprise. As one academic notes:
“The incentives it offered to potential developers were certainly attractive. All the risks seemed to rest with Industrial Estates Ltd. and the Nova Scotia taxpayers: [quoting from an advertisement for Industrial Estates Ltd.]:
Nova Scotians have the answer to expanding industry – Industrial Estates Limited. Industrial Estates Limited will completely finance and build your industrial plant in Nova Scotia, thereby freeing your working capital for other purposes.
Industrial Estates Limited will:
FINANCE CONSTRUCTION of your plant in a fully-serviced location with abundant labour,
LEASE the plant to you on a non-profit arrangement and long-term amortization.
GIVE YOU AN OPTION TO PURCHASE at a later date.
DESIGN A PLANT TO YOUR SPECIFICATIONS with your own engineers to meet your requirements,
GIVE YOU A CHOICE OF SITE in areas of surplus labour,
GIVE YOU ADEQUATE SERVICES such as water, power and roads, on selected sites,
GUARANTEE FUTURE EXPANSION facilities,
PROVIDE SURVEYS of transportation and markets.
Government imposed few restrictions. The key explicit one was Industrial Estates Ltd. was not to endanger the success and continued viability of an already established industry.
Industrial Estates Ltd. was to place emphasis on the creation of secondary manufacturing, this was believed to be the sector with the greatest capacity to create jobs to absorb low-skilled, abundant labour.
By 1964, the Conservatives had changed the model again, so Industrial Estates Ltd. had become primarily a lending agency, providing working capital to industry – this followed a decision by the Industrial Estates Board to also attract applications for funding from existing Nova Scotia-based industry and business. Frank Sobey, as President and Chairman, pointed out he would use his own business acumen to ensure Industrial Estates Ltd. would never accept a client that did not have enough capability to operate at a profit and repay its debts. By 1967, the Government had increased its investment in Industrial Estates Ltd. From $12 million to $108 million.
The members of Industrial Estates Ltd.’s board built networks in Montreal, Toronto, and Paris, and travelled far and wide to convince fellow businessmen to bring their factories to Nova Scotia. As one writer put it, Industrial Estates Ltd. representatives traveled to over forty countries promoting the province, personally meeting with business tycoons, “twanging to the ‘old boys’ networks’ offering them deals too good to refuse.”
It was important to the provincial government that it name admired businessmen to the board of Industrial Estates Ltd. so they could use their personal contacts to entice interest in Nova Scotia with generous taxpayer-funded incentives, as allowed under Industrial Estate Ltd.’s terms of reference. Questions of conflict of interest seemed not to arise. Among the first businesses attracted by Industrial Estates Ltd. was Swedish car manufacturer, Volvo. Unfortunately, as noted at the outset of this paper, the promise of industrial growth in auto manufacturing never materialized. Volvo never employed more than 200 people directly in its plant created few secondary jobs, produced barely 10,000 vehicles in an average year and did not, in the end, have a lasting effect on industrial development in Nova Scotia.
The powers that be did not anticipate this at the time. In 1965, the Atlantic Advocate claimed, “Nova Scotia is riding the happiest economic wave in its history as Industrial Estates Limited, commonly called IEL, like a ship laden with good things, brings home cargo after cargo of new industries.”
The Canadian Business magazine observed in August of 1965 actual and planned factories attracted by Industrial Estates Ltd. was so effective, “… the result, both psychological and economic, has been as electrifying as anything that has happened to the province since Confederation.”
Unfortunately, as time would tell, the exuberance was short-lived. Intentions were good; outcomes were, for the most part, bad.
(i) The Clairtone failure
The story of Clairtone Sound Corporation shows both the failure to consider comparative advantage and the irrational exuberance of the era. The company had an intriguing innovation consisting of high quality and value stereos which, like Apple much later, used industrial design (a mid-century modern Scandinavian look) to appeal to customers. The business model was not built on comparative advantages of Nova Scotia.
Many inducements had drawn Clairtone from Ontario to Nova Scotia. The subsidies and grants were too good to refuse. As the company’s fortunes shifted with poor market performance, and for political more than economic reasons, Industrial Estates Ltd. poured in “good money after bad.” By 1968, the total amount of taxpayer money invested in Clairtone was $26 million. Its assets were $3 million. By 1970, the plant was closed.
In her 2008 book The Art of Clairtone, Peter Munk’s daughter Nina Munk attributed the failure of Clairtone to IEL’s inducements to locate in Nova Scotia. She wrote, “One thing is certain: Clairtone built one of the biggest, most modern factories in the Western hemisphere in a place entirely unsuited to manufacturing.”
Things started to unravel for Industrial Estates Ltd. at the same time. A proposed heavy water plant in Glace Bay was behind schedule and over budget. (It eventually cost over $20 million but produced negligible returns and virtually no heavy water).
The original IEL plan had been to have a development corporation that would produce a return for investors. When it became evident it would be hard to attract investors, it became a taxpayer-backed model, but still with an expectation of a decent return through build and “lease back” arrangements. By the late 1960s it had become a serious burden on the Treasury.
By 1967, the tide had turned for Industrial Estates Ltd., but not before some 4,500 jobs had been “created” by Industrial Estate Ltd.’s seemingly impressive early work. The failures overshadowed what appeared to be early successes. Clairtone and the proposed Heavy Water Plant in Glace Bay, Nova Scotia had lost over $50M in public funds, a present value of over $500M.
The shift really began in October 1966 when Hawker-Siddeley, a UK-based business, announced it would close its Sydney steel plant in April 1968, and terminate 3,200 employees. The initial response of the Conservative government in Nova Scotia was shock: “It is completely lacking in any sense of corporate responsibility to its employees and to the community in which it operated.” wrote Ike Smith. [This was around the time of the economic concept that the sole purpose of a corporation was to ‘maximize shareholder value’ was popularized by Milton Friedman]. The air came out of the balloon for Nova Scotia. According to one academic,
In one fell swoop, this could destroy the job gains of … IEL over the years. [The Premier] also had to consider the impact such layoffs would have on the wider economy of the region. And, he had to consider the negative impression this development might have with those potential investors he had hoped to attract to Nova Scotia over the next two years.
To maintain government’s image of creator and protector of jobs, this led to a quick decision by the provincial Cabinet to keep the plant running. Government soon found itself in the position of being owner and operator of a steel mill, a drain on provincial resources for many decades.
(ii) The Michelin Grand Slam Home Run: and the ensuing strike outs
There was, however, one noteworthy exception.
One hundred years after the French revolution and during the industrial revolution, brothers Edouard and Andre Michelin came up with the idea to manufacture inner tubes and “tyres” for bicycles, which were then being mass produced by other manufacturers.
To specialize in tyres, in 1889 they converted part of their machine shop in the historic town of Clermont, next to a dormant volcano in the very center of France, into a tyre manufacturing facility.
In the 1970’s Michelin decided to go global and build factories in strategic locations throughout the world. The business started by Edouard and Andre Michelin had by the 1960’s built extensive factories throughout the city of Clermont employing up to 30,000 workers. At one time Clermont was a worldwide leader in the industry of tire manufacturing. It then began its global expansion.
Now, Clermont is the global headquarters of Compagnie Generale des Establissments Michelin SCA, the second largest tire maker in the world operating under the business name Michelin. Most of the manufacturing is now done in foreign countries closer to markets.
It is now a global giant. Michelin has an annual revenue of over €24.13 billion or CDN$36 billion, in other words its revenue is about three times higher than the annual revenue of the government of Nova Scotia. It achieves annual operating income of about C$5 billion or almost 50% of the needed expenditures for all public services in the annual budget of the province of Nova Scotia (excluding debt service).
Michelin currently has 7 R&D centers and 69 manufacturing facilities located in 17 countries. (France -10, Germany -4, Spain -4, Italy -2, United Kingdom -3, Hungary -2, Poland 1, Romania 2, Serbia 2, Russia 1, United States 11, Canada 3, Mexico 2, Brazil 4, China 2, Thailand 3, and India 1.)
That the three Michelin factories in Canada ended up in Nova Scotia is one of the few sustained success stories of Industrial Estates Ltd. How tiny Nova Scotia became a location for the three factories manufacturing Michelin tires in Canada is a fascinating story.
In 1969 the shareholders of Michelin authorized the company to borrow to fund a global expansion. Michelin had developed a premium product radial tire that sold for a much higher value than its competitors in Europe. From 1966 to 1969 its tire sales had quadrupled in Europe and, with its unique radial tire, Michelin wanted into the North American market quickly.
By the end of the 1960’s demand for steel belted radial tires was on the rise, Michelin ran the risk that Goodyear and Firestone would capture the North American market if Michelin were not a manufacturer in North America.
Just as the stockholders of Michelin authorized borrowing for global expansion, as the story goes, a chance encounter in the first-class section of a transatlantic flight between Industrial Estates Ltd. vice president Robert Manuge and a senior executive of car manufacturer Citroen led to an introduction to Michelin. Industrial Estates Ltd. was in the business of giving money away and Michelin was in the business of making money so, needless to say, it was a fruitful introduction for both.
Between IEL and the Federal government, Michelin only had to pay about 1/3 of the actual capital cost of building it first two tire manufacturing plants in Nova Scotia. For good measure, the federal government waived import tariffs on certain raw materials for several years.
Michelin operations in Nova Scotia were a resounding success and both the promised jobs, exports, tax revenue and multipliers ensued. Local trucking companies expanded, contractors and suppliers benefitted from the presence of Michelin and, for the first time since the closure of the steel plant in Sydney, manufacturing was on the upswing in Nova Scotia, but now rather than 19th Century rails and railcars Michelin had a product – steel belted radials – that were both an innovation and at the beginning of the growth curve, as automobile production and use was on the rise.
Another chapter in the Michelin story occurred in 1979 when the government of the day amended the Trade Union Act to make it difficult to unionize Michelin manufacturing facilities. In turn, Michelin announced it third plant for Nova Scotia at Waterville.
As Michelin plants are said to compete with other of its plants for capital allocated from Head Office in Clermont, governments are frequently encouraged to join the local plants in pitching for attention from Head Office, including offering local subsidies. This often includes grants, supports for training, low interest loans, water supplies and other assistance. Michelin is perpetually at risk of “closing a production line” and every 10 years or so a new infusion of public money seems to be needed to keep production in Nova Scotia. As some might say, “a good problem to have”, but a problem, nonetheless.
Overall, the Michelin story has been a happy one when measured by GDP and export growth. For the workers, it has also been positive from the point of view of wages, benefits and opportunities. Michelin has been a progressive employer. The company has a commitment to safety, quality and worker participation, has a no lay off policy and pays wages and benefits above industry averages.
Paradoxically, the success has also been a challenge for economic development policy in Nova Scotia. A European company with a progressive business philosophy that promotes premium quality, research and development and above market wages and benefits is an excellent manufacturer to have in your jurisdiction. Michelin is an exceptional company and the circumstances that brought it to Nova Scotia were, likewise, exceptional.
It is a “grand slam home run” and a “no hitter” in one game. The unique and fortuitous conditions that led to Michelin’s presence in Nova Scotia, and that it remains an advanced manufacturer here that has not globalized by moving all production to low wage jurisdictions is remarkable. Politicians and policy makers believed the only thing better than having Michelin would be to “find another Michelin.”
And this is the problem. For a long time, economic development in Nova Scotia often implicitly meant “find another Michelin” and induce it to come to Nova Scotia. However, another Michelin proved elusive. The unique set of circumstances that resulted in Michelin choosing Nova Scotia were hard to replicate. The limits of “industrialization by invitation” were showing in Nova Scotia’s economic performance and continued outmigration throughout the 1990’s and first decade of the new millennium.
As successful as Michelin was, when one probes the Industrial Estates Ltd. record more carefully, the “industrialization by invitation model” was a clear failure.
In the ten years from 1968 to 1978, its scorecard was filled companies that had ceased operations in Nova Scotia within a few years of receiving taxpayers funds: Aero Scotia Limited, Genu Products Canada, Frisimat, Simmons, Associated Lighting Products, Boise Cascade, Playtex Canada, Digital Components Limited, Precision Homes and Components, Industrial Systems, Electrophome Limited , Nortel, Lifesavers Candy, Undersea Equipment (which ceased before they could receive even their IEL financing), Masonite Canada, Millco Supplies and Maritime Protein Limited all failed within a few years of receiving government funding.
The foregoing list is just a smattering of the failed attempts to transform the economy through “investment attraction” through subsidy. Even partially successful investments were not sustained. Crossley Karastan Carpets was a modest success. It operated in Truro from 1964 until 2019 when it laid off 240 people and consolidated operations in Georgia.
In an editorial written in 1968, before the above list of business failures, IEL’s President Frank Sobey attributed Industrial Estates Ltd.’s success to their skill in assessing businesses opportunity aided by their ability to maintain the interest and active participation of prominent Nova Scotia businessmen on their Board and “several outstanding men from such fields as law, finance and business to be members of the advisory council of IEL”. (Financial Post, October 5, 1968.) In the end, this did not work.
Industrial Estates Ltd. initiated a policy of industrialization by invitation that became ingrained in economic development policy even after it was gone.
Magna International is one of Canada’s most successful manufacturing enterprises. It is integrated into the global auto industry and has made the Stronach family billions. Frank Stronach is the founder of Magna International, an international automotive parts company based in Aurora, Ontario. With an estimated net worth of $CAD 3.06 billion (as of December 2017), Stronach was ranked by Canadian Business as the 31st richest Canadian.
Magna was lured to North Sydney, Nova Scotia in 1987 with an initial $7M in government subsidies. Twenty-one years later, at the beginning of the 2008 global recession it closed and laid off all its staff of 260. By that point, the company had concluded the plant was not viable due to wages, proximity to markets and global competition: “Those factors, combined with the difficult economic conditions facing the North American auto industry due to reduced domestic production and customer demands, have made the manufacturing facility no longer viable.”
One might argue, $7M of public funding for 21 years of steady work was worth it. Frank Stronach would. I wouldn’t, nor would any of the 260 laid off in 2008.
But 21-year years is a long time in the Nova Scotia economic development industrialization by invitation model. In the 1990s Nova Scotia funded a company called DynaTek, a computer storage system company, that was to put Nova Scotia in the forefront of the information technology sector. It was lured with generous subsidies in 1993 and five years later was put into receivership when then Minister of Economic Development Manning MacDonald ordered a forensic audit saying “There have been some serious allegations about DynaTek in the past couple of weeks. We want to get to the bottom of this.” History repeated itself in 2010 when the government pumped $56M into the DSME facility in Trenton, Nova Scotia and in 2020 wrote off $48M of investments and loans in DSME Trenton following its receivership. Despite a grand announcement of 500 intended jobs, sales never materialized and by the time it went into receivership it had no customers and just 19 employees.
(iii) The Cultural and Political Consequences of Failed Economic Policy
These business failures confirmed what economist John Graham predicted in 1963; “The forcing of types of economic development for which conditions are clearly unfavourable is likely to result in considerable waste of resources over long periods of time and a concomitant depressed psychological state of the people.”; or as Stephen Harper put it, “a culture of defeat.”
What is ironic is after the exuberance of the “announceable”, economic failure is politically damaging.
The failures of Industrial Estates Ltd. were so politically unpopular, and the word “boondoggle” so closely tied to IEL’s later work, it is a wonder any politician still supports investment attraction efforts at all. Ultimately, it was the performance of Industrial Estates Ltd. that determined how well the Stanfield/Smith government had performed in the eyes of the public and they lost to the Regan Liberals in 1970 as a consequence. As historian J. Murray Beck wrote:
IEL, the chosen instrument for [eliminating regional disparity] had occupied a hallowed place in Conservative party rhetoric … In the end IEL stood discredited and forlorn, never to attain anything like its former position.
As went Industrial Estates Ltd., so went the Tories, and the subsequent Liberal government of Gerald Regan eventually wound-up Industrial Estates Ltd.
However, the policy underpinnings of this era did not change with a change in Government. In the 1973 Throne Speech government continued to tout IEL as having “created” 10,500 jobs through their activities (together with other industries attracted by a new government department), though noting in the same speech that “none of the industries which have been assisted by the new Department of Development or I.E.L have received grants from my Government.” Undeterred by the failures of IEL, in the same Throne Speech the Regan Government announced its intention to create yet another new Crown Corporation to drive job creation to be called Metropolitan Area Growth Investments Limited, to disburse $20M to “generate significant economic activity in the metropolitan area.” This entity is all but forgotten in Nova Scotia’s economic development history and its only legacy is the faint recollection of an ill-fated attempt to establish a publicly owned cruise ship business by buying a ship called the Mercator One.
PART 2: An Assessment: Six Lessons from Nova Scotia
Of the era when Nova Scotia had some moderate, short-term success in fighting regional disparity, a biographer of then-Premier Ike Smith seemed to be on to something when he observed, “Political interests, business interests, labour interests and public service interests had not been able to reach a consensus of purpose and plan.” Other than short term job announcements and money for industry, the purpose and long-term plan was opaque.
When assessing this era, we should avoid the “imagine how bad it would have otherwise been” trap; and instead ask, “I wonder what would have happened if we made different choices?”
Industrial Estates Ltd. was an act of desperation. In 1956, Ike Smith believed industry would not locate in Nova Scotia unless there were generous taxpayer funded incentives to attract businesses. It signified an appalling lack of confidence in the people of Nova Scotia and the inherent strengths, advantages, and opportunities present in Nova Scotia.
As an aside, it is worth noting that in 1956, the composition of the Nova Scotian economy and our physical resources were in all material respects comparable at the time to Norway, with both jurisdictions relying primarily on fishing, farming, and forestry. Norway, which, economically, was a statistical twin of Nova Scotia in the 1950’s with comparable GDP per capita and similar economic sectors built a strong domestic forestry industry, an aquaculture industry which leads the world and, ultimately an offshore oil and gas sector with a strong service sector associated with it. Norway chose comparative advantage over industrialization by invitation.
IEL ultimately failed and wasted resources. The failure contributed to a “concomitant depressed psychological state of the people.”
The concept was rooted in scarcity thinking and a lack of confidence in the entrepreneurial and innovation capacity of Nova Scotians – a view that, left to their own devices, Nova Scotians were disadvantaged, Nova Scotia was not “well endowed” with resources or opportunities, the capable people had left and only public subsidy could fill the competitiveness gap and connect people to the workforce. In this way, it was believed, the workforce would be marginally more productive than would be the case with high levels of unemployment. It was a pretty small ambition.
In contrast, the importance of building on comparative advantage with innovation – creating new to the world things that have value – is the foundation of most economic growth. This was the road not taken, a policy choice not pursued until after the Ivany Report of 2014.
In retrospect, there were the clear shortcomings of the Government incentive to specific enterprises model for economic development pursued since 1960. If you follow the money, the main thing it did was make profitable, large corporations even more profitable by reducing their overall costs of doing business or, more frequently, prolong the life of unprofitable business that were destined to fail. Nova Scotia had its share of grifters and grantrepreneurs who were in it for the subsidy and had no real chance at business success.
Most businesses generate most, if not all their revenue from sales of their goods or service, but those with government subsidies, often highly profitable businesses, can give their shareholder a little more value in dividends, or their Senior Managers may receive bigger bonuses, because they can generate ancillary revenue from the taxpayers of Nova Scotia for hiring Nova Scotians. In other cases, companies unable to generate sufficient revenue in the market to succeed seek to offset their shortcomings with public funding.
In the time of Frank Sobey and G.I. Smith, the provision of financial resources (subsidy) was predicated on an assumption (somewhat flawed) that this would free up financial resources elsewhere in the enterprise, which could be invested in the business. In practice, the “revenue” from subsidy often simply enhanced shareholder profits and in any event, in multinational corporations there could be no assurance that the “freed up” working capital would be invested in Nova Scotia. History shows it rarely was, and in fact government often found itself “competing” with other plants of the same multinational in other jurisdictions for “new” investment despite past support.
Government’s role in the economy should be limited, focused and collaborative. The entrepreneur or enterprise is the central agent in the wealth creating aspects of economic growth. The entrepreneur ultimately leads. The entrepreneur’s success determines the outcomes of a jurisdiction’s economic development strategy. A policy choice of making the jurisdiction broadly attractive to entrepreneurs and enterprises rather than specific grantrepreneurs, jurisdiction shoppers and rent seekers is a clearly superior policy choice.
The required shift is for government to move away from providing supports for production inputs to specific enterprises in the innovation process and to better support the process of innovation itself.
In a new paradigm the focus should be on the system for innovation rather than individual enterprises; government shifts from “funder” to “facilitator and collaborator” – and government becomes a partner and stakeholder in the innovation system at the system level (and less at the firm level), along with entrepreneurs, post-secondary institutions, established corporations, venture capitalists, workforce members and citizens/customers.
The essence of a system of innovation concept rests on the idea that an agglomeration of firms, developing a web of relationships and subtle mixes of co-dependence and competitive practice, leads to the creation of comparative advantages for the territory where the agglomeration is located (e.g., Norway, Silicon Valley, Israel, Australian wine clusters).
This approach to economic development policy is distinctly different from subsidization policies of the past. To reiterate, it is primarily focused on the system level and not the individual firm. Politicians and government departments afflicted with path dependency and an inability to change can be a barrier to good policy thinking. As one academic wrote, “The policy scene is still dominated by linear tools, addressing inputs in the innovation process rather than the functions of the system and providing support to firms in isolation rather than to the network of actors.” What is needed is system-oriented programs such as those that connect research and knowledge to the innovation ecosystem rather than firm-oriented policies, such as firm level subsidies, tax breaks, rebates, inducements, and other similar tools directed at “big game hunting” to attract factories to the jurisdiction. In 2015, Nova Scotia changed its approach and has changed its outcomes.
Here are six lessons from Nova Scotia’s pre-2015 experience with forced growth:
- Despite occasional bouts of prosperity, the economic history of Nova Scotia shows that relative to other regions of Canada and much of North America, the province has underperformed economically using GDP measures. This inevitably affected economic culture – beliefs, attitudes and confidence – as well as regional and social cohesion and alignment behind policies to achieve inclusive growth and improved quality of life, including a reduction in poverty rates.
- The “Government-Led Economic model” embraced by federal and provincial governments has not worked. Government agencies charged with growing the economy were unable to do so at a pace to achieve and maintain parity with other regions of Canada. Since ACOA was founded in 1987 to reduce regional disparity, regional disparity grew. Nova Scotia Business Inc, a successor to Industrial Estates Ltd., was founded in 2001 to lead the implementation of programs to expand business activity in Nova Scotia. Twelve years later the Ivany Commissioners reported on “accelerating population decline and deepening economic stagnation.” Jobs came, jobs left, but business activities did not expand sufficiently to achieve growth comparable to the rest of Canada. Between 2009 and 2015, Nova Scotia and New Brunswick had continued to have the slowest growth in Canada, assessed by real GDP growth, and continue to be forecast to be the slowest growing economies in Canada. In the last few years, this has begun to change and with the 2020 COVID-19 pandemic the conditions for transformative change exist.
- If economic development policy implies a fundamental change in a region’s capacity to create and share wealth, successful development policy should result in self-sustaining growth. Nova Scotia’s policy choices to date did not result in any fundamental alteration of Nova Scotia’s capacity to create wealth. During the last 30 years, leading up to the Ivany Report Nova Scotia’s economic development policy had been a failure leaving the Ivany commissioners alarmed about the demographic and economic trends facing Nova Scotia: “Nova Scotia hovers now on the brink of an extended period of decline.”
- Job creation is not a substitute for economic development, though job creation and expanded opportunities for meaningful work should be a consequence of effective policy. Job creation may imply economic growth had occurred but job announcements, induced only by government subsidy, often create only the illusion of growth.
- Some of our core economic policy tools had unintended consequences and perpetuated rather than alleviated regional disparity. As the economy has shifted from a manufacturing/industrial-based economy from the late 1800s to 1970s, to a knowledge-based economy, policy initiatives that focused on offering low-cost, subsidized “low skill or no skill” labour have exacerbated regional economic disparity. The policy orientation of the 1980s to 2015 did little to build on the region’s strengths. In Canada, Nova Scotia and New Brunswick have been the dominant users of wage subsidy, payroll rebates, and production subsidies, and each have had the weakest economies in Canada in the 30 years leading up to 2015, with very low rates of labour productivity. This raises the question of whether competing based on low-cost labour and subsidy may have weakened rather than strengthened our economies. In short, is subsidized low-skilled labour and production a competitive advantage? Or do subsidies attract low-productivity business seeking to offset wage and production costs or “grantrepreneurs” who rely on government subsidy for business success?
- The “Machinery of Government” as well as its tools used for economic growth needed to be fixed. Rather than dominating economic growth as in the 1970-2015 period in Nova Scotia, the provincial government should, as it did between 2014 and 2021, play a limited, enabling, and collaborative role and reorient economic development policy at the systems level focused on new and better ways to attract and keep people (rather than just keeping existing multi-national corporations),collaborate with communities, post-secondary institutions and the private and social sector and other stakeholders to achieve inclusive economic development and measurably improved social well-being.
Conclusion: What Causes Economic Growth to Occur?
The short answer is, not the public subsidization of individual enterprises like Volkswagen, Volvo, Clairtone or Michelin. This may increase profits for specific enterprises, but the Nova Scotia case study shows it does not cause economic growth.
Economic theorists and historians have created many models to explain the process of how economic growth occurs, including why growth may be rapid in one region, at one time, and leave others behind.
There is a consensus that something important happened in the eighteenth and nineteenth century in Western Europe and Britain that led to dramatic economic growth that has become almost global. Since the 1800s, many theorists say growth has ebbed and flowed through technological changes triggering further phases of this ongoing “industrial revolution” that began at the turn of the nineteenth century. Rarely is subsidy of a specific enterprise seen as the way to achieve economic development.
The intensive study of the problem of economic development has produced an extensive list of factors and conditions, obstacles, and elements for economic development. Economic development research has led to many advances, yet the “proximate causes” or the primary forces of economic development for specific regions has proven elusive as the economic history of the Nova Scotia shows.
Economists and economic historians, like Albert O. Hirschman in The Strategy of Economic Development (1961) and David Landes in The Unbound Prometheus have provided some insights to guide thinking.
In the late 1950’s Albert O. Hirschman theorized that:
Development depends not so much on finding optimal combinations for given resources and factors of production as on calling forth and enlisting for developmental purposes resources and abilities that are hidden, scattered, or badly utilized.
He challenged the dominant theory of economic development and advanced a theory of “unbalanced growth,” as he put it. Governments should intervene to build on comparative advantages by finding the hidden, scattered or badly utilized strengths of their jurisdictions.
But how to intervene?
This is where David Landes’ work, The Unbound Prometheus: Technological Change and Industrial Development in Western Europe, 1750 to the Present provides key insights.
Landes, a prominent economic historian, undertook a detailed study of technological changes and industrial development by carefully examining those factors that appeared to trigger and then sustain the Industrial Revolution in Europe. In his history of the Industrial Revolution, Professor David S. Landes observed that many continental European governments became active in campaigns of “forced industrialization” following the onset of the Industrial Revolution in England. In commentating on the modest success of early efforts of forced growth, he concluded:
The State of the seventeenth and eighteenth centuries was incapable of planning development rationally or allocating resources efficiently. It lacked conceptual tools … it had a strong affection for the wrong products … and it was not even sure of its own purposes in the face of resistance from conservative interests… In particular, State assistance was more often than not an encouragement for laxity and a cover for incompetence … privileged manufacturers were sloppily managed and required repeated transfusions of royal capital.
He observed that many enterprises failed as soon as they were cut off from government largesse. He quoted a contemporary observer who said, “The money of the King brings bad luck to those who receive loans or advances.”
While refraining from advancing an overall theory of such a complex set of interacting variables, he was able to enumerate some sources and dynamics for the observed economic growth of the period reviewed (1750 to 2000) He attributed economic growth to the following sources and dynamics:
- The “law” of comparative advantage (which he considered to be historically validated);
- Science and technology and technological change (innovation);
- Economic and non-economic values in society (culture);
- Institutions and rules (for example, the rule of law, limited liability corporations, monetary value);
- Demographics and skill development/education (a talent and skills agenda);
- Trading – particularly high-value goods and services (exports);
- Acceleration, emulation and “catch up”;
- Locational advantages and urbanization;
- Cluster dynamics;
- Resources and factors of production (including land, labour, capital) being allocated to areas of highest returns for the region.
That government-subsidized forced growth is not a good long-term policy should be obvious. That it is politically expedient and popular to business is not surprising. As author George Gilder wrote, “For all their ideological commitment to free enterprise, businesses are primarily devoted to successful enterprise and are delighted … [to] feed off the government while celebrating free markets.”
One hedge fund manager went as far as saying, “CEO’s have duties to their shareholders. If the state is willing to hand out gifts, there are many who feel compelled to go get them”. (Quoted in Freeland, Plutocrats p.261)
A careful review of Nova Scotia’s economic development history reveals very little focus on, or attention paid to, most of the “sources and dynamics” of economic growth enumerated by Professor Landes, in particular comparative advantage and technological change.
More time and money had been spent trying to “find another Michelin” than to identify and then build on comparative advantages inherent in Nova Scotia, like its universities and community colleges, livable communities and the all-pervading presence of the sea. Only recently has Nova Scotia identified the ocean economy as a sector for growth.
Rather, Nova Scotia pursued an industrialization by invitation strategy focused first on transplanting manufacturing, then, later, on being a “back office” for large multinationals and hedge funds, banks and financial services businesses knowing it would actually put a cap on productivity growth and was “likely to result in considerable waste of resources over long periods of time and a concomitant depressed psychological state of the people” when it failed, as economist John Graham warned in 1963. Nova Scotia’s past approach resembled that of many of the economies left behind, which Landes called “backward economies.” The approach is noteworthy for its frequent effort at forced growth and emulation, government intervention and excessive use of subsidy. Its record is one of low growth and poor outcomes.
Landes notes a pattern – one evident in Nova Scotia’s development – the bigger the gap between economic performance and possibilities, the more the State will assume the responsibility for economic growth and intervene to promote growth. If the State intervenes inefficiently, it is more likely to retard rather than enhance growth.
In fact, I would go so far as to say that the economic policy first promulgated in Nova Scotia by G.I. Smith and Robert Stanfield in the 1960s – of industrial or business attraction through subsidy, what I have called “industrialization by invitation” – was not economic development policy at all. It was merely “sales” or business development, which, the data shows, did very little to fundamentally change the path of economic growth that could have improved the prospects for long-term growth for Nova Scotia.
Rather than building through comparative advantage, innovation, demographics, skills development, or trading in high-value goods and services, Nova Scotia and most of Atlantic Canada focused on emulation and catch-up, rooted in marginal productivity thinking (i.e., “something is better than nothing”). The starting point often was as “have not” provinces not endowed with strong factors of production and destined to be low income, it would take anything or pay anything just to get jobs. With a sense of scarcity, politicians chased losses and pursued industrialization by invitation. Canada faces the same risk.
Research, comparative advantage, skills development, innovation, trading in high value goods, when push came to shove, were left on the bench when politicians perceived an opportunity to solve economic problems with one swing of the bat and when the attraction of a big employer planning a new factory with the promise of with steady jobs presented themselves, like Volkswagen.
Is there a lesson here for Canada about forced growth?
I think there is.
