Let’s imagine that our beloved minister of Northern development and mines, Michael Gravelle, decides to consult one of the world’s leading experts on development for areas like Northern Ontario. Rick van der Ploeg is the research director at Oxford’s Centre for the Analysis of Resource Rich Economies. Between 1998 and 2002 he was state secretary for culture and media in the Netherlands, so he also knows a bit about politics.
Earlier this year van der Ploeg—let’s call him Rick—released a paper called Guidelines for Exploiting Natural Resource Wealth. Here is a quick summary of what Rick would tell Michael.
According to Rick, one of the key challenges for a resource-rich region is to convert the natural resource in the ground into long-lasting assets above ground.
Chromium deposits in the Ring of Fire have to be turned into infrastructure, human skills, and financial assets held abroad.
Since a country’s foreign debt is a negative asset, Rick recommends paying it off using resource revenues. I find this advice a bit problematic. Northern Ontario has already contributed billions to building southern Ontario and it is still poorer than the rest of the province.
But back to Rick’s guidelines. A major resource project is a bit like a case of marshmallows: it is tempting to eat the marshmallows as soon as the box is opened. This piggy policy is both inefficient and unfair. It is unfair because only the current generation benefits. Future generations are entitled to a share of the region’s resource wealth. An ore body should be a gift that lasts, not the equivalent of an economic sugar high.
The solution is to spend some resource revenues on productive resources like infrastructure and training. These investments provide benefits down the generations. Money from the Ring of Fire spent on First Nations education fits this guideline perfectly.
Rick’s main recommendations are that Michael set up three separate funds to help use the wealth created from the Ring of Fire. The first fund is designed to help share benefits between generations. Rick calls that an “intergenerational sovereign wealth fund.” Once the debt is paid off, all the resource rents go into the fund so future generations can collect the interest. Norway did this and is sitting pretty. Our Albertan friends have been gobbling up their tar-sands marshmallows. They didn’t get a bellyache, but Ontario got the Dutch disease.
In theory, benefits should be shared with the generations that come before the revenue starts to flow, too. What often happens instead is that earlier generations get stuck with the bill for infrastructure and training and later generations get to eat the marshmallows. We suffer for our kids.
Rick recommends borrowing in this case. Borrowing lets us pay for the infrastructure and training with future revenue. We can have a marshmallow or two for ourselves—our share of the region’s newfound resource wealth.
Since resource revenues rise and fall, Rick advises setting up a “liquidity fund” to smooth out government income. He also suggests setting up an “investment fund to park money for planned investments.” This fund lets the government time its investments. It can spend when the private sector is not spending and cut back when the private sector is investing a lot. The classic boom-bust cycle actually reduces growth and wastes resources. The investment fund produces a more stable economy.
Rick has some warning for Michael, too. The biggest risk with these targeted funds is future politicians will use them to buy votes. Michael should make the funds as public and transparent as possible. We should all be able to see if someone is raiding the piggy bank. If he can’t do that, Rick says it may be better to postpone development until we get a fairer and more democratic political system.
As an economist, Rick can give us guidelines about timing and the mix of assets. It is up to Michael to get the political support for doing the right thing. It is also up to Michael to make sure that a fair share of the long-lasting assets above ground end up in Northern Ontario. The technical questions are pretty simple; the politics are hard.