How to fix southwestern Ontario’s economy: Mike Moffatt

No silver bullet, but a salvo of ideas.

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While the national unemployment rate currently stands at 7.2%, some regions are suffering more than others. Southwestern Ontario is one such place, with Windsor and London showing 9.2% and 8.6%, respectively. And so, as a business school economist in London, Ontario, it isn’t surprising that the question I’m most frequently asked by non-economists is some variant of “How can we grow southwestern Ontario’s economy?”

My first response is to point to some recommended reading on the topic, including several research papers by the Mowat Institute (see here, here and here). I’m also looking forward to coming recommendations from the Ivey School of Business’ Lawrence Centre which is working on a number of regional research projects. (On the other hand, if I’m at a cocktail party and feeling glib, my response is similar to that which I gave in the middle-class roundtable.)

But there is no silver bullet—it will take a suite of smart policies and a willingness to experiment. That’s the short answer. The longer answer is not policy prescriptions per se, but rather things we should be mindful of when developing and promoting policy ideas.

Support at the industry level should be general and based on real comparative advantages. Identifying the region’s well-positioned industries is an easier task than identifying companies, particularly when examined from the point of view of comparative advantage. Among other features, southwestern Ontario is geographically close to a number of major U.S. markets, has an excellent higher education system, a strong financial sector, strong manufacturing cluster and some of the best farmland in the world. There are ways to support industries backed by these comparative advantages without resorting to direct subsidies. Regulatory harmonization and ensuring open borders with the U.S. must be of vital importance. And ensuring pork farmers, for example, have access to European and Asian markets should be a goal of international trade negotiations.

When discussing industries, we must be wary of arguments such as “green energy is the future, so it makes sense for the government to invest there.” But what form is this government investment taking? What are the costs? Does the region have useful comparative advantages that would ensure industry survival? I find the Public Policy Keltner List useful for answering these questions.

Governments are awful at picking winning companies. Let the market figure out which companies will succeed. Providing corporate welfare to rich business people simply worsens the region’s inequality problem. We need to look elsewhere for answers.

Strong, but smart regulation can improve export opportunities. There is a common belief that there is always a trade-off between regulatory strength and economic growth. This doesn’t have to be the case. Strong regulation can sometimes be a comparative advantage when exporting products. The best example of this is consumer safety regulation in agriculture. Food safety is a top-of-mind concern among the middle-class in large, emerging markets such as China and India. (One only need consider the 2008 Chinese milk scandal for evidence). By ensuring that Ontario has the safest food in the world, we can use this as a unique selling proposition to overseas markets. This is a real opportunity to fill with Ontario’s agricultural products the shipping containers that return to China empty.

Where will the region get the money for infrastructure projects? A common suggestion for strengthening the regional economy involves the federal and provincial governments spending billions on infrastructure projects such as high-speed rail. There is no question this would help the area; spending billions on a Tim Raines statue for the baseball museum in St. Mary’s would grow the economy if it were done with some other region’s money (of course we wouldn’t build a billion dollar statute, $100 million should cover it). Similarly, this isn’t to suggest high speed rail or expanding the highway from London to Sarnia wouldn’t be useful, but rather to point out that claims of their economic benefits to the region will necessarily turn out favourably. However, that money ultimately has to come from provincial and federal governments trying to balance their budgets, so we should temper our expectations.

Look to manufacturing to create more wealth than jobs. This is best illustrated with a story. A few years ago I was giving a regulatory talk in Georgia to a group of managers and executives in the consumer aerosol products industry. One of my clients was there and asked if I would like a tour of his newest facility. I was absolutely blown away by what I saw. The factory must have been the size of several of football fields; it was large enough that golf carts were available to take you from one end to the other if you wanted. The thing I noticed most, however, was the lack of people on the floor. I saw perhaps all of two people milling around, clipboards in hand. Everything was automated, the whole process reminding me of the old board game Mouse Trap. This is the face of modern manufacturing, and it’s borne out by the manufacturing revenue per production employee data. If there is job growth in manufacturing it will be in areas such as sales, purchasing, research and development, and regulatory compliance.

Southwestern Ontarians are a resourceful lot, so I’m confident the region will fully recover from the recession and experience sustained long-run growth. Smart policies from all three levels of government can certainly help.

Mike Moffatt is an assistant professor in the Business, Economics and Public Policy group at the Richard Ivey School of Business, University of Western Ontario.


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