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The Idiot’s Guide to Being a resource minister

Here is some bedtime reading for Claude Gravelle, Greg Rickford and Kyle Fawcett. The Three Amigos are the most influential resource ministers in Canada. Mr. Gravelle and Mr. Rickford are familiar to Northerners.
David Robinson, Economist, Laurentian University,

Here is some bedtime reading for Claude Gravelle, Greg Rickford and Kyle Fawcett. The Three Amigos are the most influential resource ministers in Canada.

Mr. Gravelle and Mr. Rickford are familiar to Northerners. Fawcett is Alberta’s new minister of Environment and Sustainable Resource Development. They are in charge of much of Canada’s natural resource wealth and they have access to the three most powerful politicians in the country. They are responsible for getting Canada’s resource policy right. This modest column should help them do their jobs.

The Idiot’s Guide to Being a Resource Minister is actually called Guidelines for Exploiting Natural Resource Wealth, by economist Rick van der Ploeg from the Oxford Centre for the Analysis of Resource Rich Economies. The guidelines were written for resource ministers in resource-rich countries like Canada.

Five recommendations summarize 100 years of research in resource economics. If we compare Canada’s resource practice to the recommended policies, we can produce report cards for each of the Three Amigos. Let’s mark each jurisdiction out of 20 for each guideline.

Guideline1: Live off the interest on your resource wealth, not the capital.

The Alberta government has a Heritage Fund in place, but it actually deposits only a small proportion of its oil and gas revenues.

Oil income has been used to keep taxes low, so every Albertan could buy a pickup truck or two. Instead of living off the interest on their resource wealth, Albertans have been squandering most of their inheritance.

Despite its name, the Northern Heritage fund is just a checking account. It has nothing to do with investing resource revenues. Canada has no Sovereign Wealth Funds. It looks like Alberta earned three out of twenty, and the others get zero.

Guideline 2: Avoid the Dutch disease and build an intergenerational fund to smooth consumption.

The poster child for good management is Norway’s Petroleum fund, now called the Government Pension Fund Global, which has grown to $857 billion.

In Canada, resource revenues belong to the provinces. The province has run down the fund by $22 billion over the last six years. It has $17.4 billion left. Alberta should probably get negative points.

The federal government was just as bad. The Harper government relied on oil revenue to reduce its monster deficits. For Canada as a whole, spending the oil money as it came in drove up the exchange rate.

Beine, Bos, and Coulombe estimated that the oil revenues cost Canada more than 100,000 manufacturing jobs. Zero out of 20 for everyone.

Guideline 3: If you have resources coming online, you can borrow to build the needed infrastructure.

This is exactly what Ontario has been afraid to do in the Northwest. No development in advance of the Ring of Fire. Minus two for Ontario, minus one for Canada.

Guideline 4: Set up a contingency fund for times when resource prices crash.

This is especially important if commodity prices are volatile and shocks to commodity prices are persistent, as in the oil industry.

Alberta’s premier, Jim Prentice, must be wishing his predecessors had followed this rule. His province is in serious trouble because oil prices have fallen so sharply.

Mr. Harper is also seeing his surplus melt away and he is drawing down his contingency fund. And Mr. Putin, who also gambled heavily on oil prices, is in deep trouble. He may just lose his job. Two out of 20 for everyone.

Guideline 5: Invest more in assets that are negatively correlated with returns on natural resources.

This is standard advice for investors; it says don’t put all your eggs in one basket. All three get points for investing in education and innovation.

Mr. Harper’s policy loses points for shifting labour and capital from Ontario’s industrial base to Alberta’s oil sector. He put all his eggs in one basket, which just happened to be in his own province. Twelve for Alberta, four for Canada, seven for Ontario.

Adding up the scores for the Three Amigos, Alberta’s Fawcett comes out on top with a score of 17 per cent. Greg Rickford gets 5 per cent and Claude Gravelle has earned a stunning 8 per cent. Better read the Idiot’s Guide, boys. In fact, read it to your bosses. You can do a lot better.