Alberta’s economic woes and its most important asset

Two of the world's most prestigious credit rating agencies recently announced they have changed their assessment of Alberta's economy.

Two of the world’s most prestigious credit rating agencies, Standard & Poors and Moody’s, have recently announced they have changed their assessment of Alberta’s economy. The former said Alberta was down to double A from a triple A standing and the latter reduced its rating to a “negative outlook” from neutral but kept the triple A. The announcements gave a lot of ammunition to a wide range of commentators, pundits and, of course, politicians to intensify the criticism of the Notley government. Needless to say, many also offered a lot of solutions, ranging from adopting Japan’s post-war economic development model to reforming Alberta’s financial markets to attract more capital.

All of these ideas probably have their merits and they could be discussed, but the idea that the province’s economy can be reformed through adoption of one or another single policy looks quite superficial.

But before discussing any policy options, one should be aware of the fact that the credit rating agencies that downgraded province’s economic outlook are no dependable judges of financial precision. It is a proven fact that these agencies gave the AAA ratings to the mortgage-backed securities before the 2008 financial crisis, instruments which blew up in the hands of investment bankers and hedge funds, leading to the downfall of several financial institutions and they are still fighting court cases in the US stemming from their negligence in properly evaluating the viability of those investment instruments.

Returning to Alberta, how realistic are the suggestions aimed at reviving the province’s economy?

Let’s take for example the idea of adopting the Japanese model. The author of the idea gives the rise of the electronics company Sony as an example of how advanced technology can make a company flourish and create a model for other businesses to expand and lead the economy to growth. But when Sony started to grow, there was a fast expanding market for its products because the world economy was growing at breakneck speed. Now exporting economies are in dire straits because their markets are shrinking. Plus, the people of Alberta are not as hard working as post-war population of Japan, whose loyalty to their country and emperor made them accept the hardest working conditions while here we are very strict in implementation of our 40-hour working week and in our demand for overtime pay as soon as we go over the limit.

Take the idea of reforming the capital markets in the province. According one economist, every month $ 2 billion is leaving the province to be invested in Toronto or New York or other big financial centres to be invested for mutual funds, stocks or RRSPs or TFSAs. The economist suggests that the province should create the environment for the outgoing funds to be retained in the province so that they could be transformed into funds to be invested into real economy, creating employment, and consequently demand and consumption to lead to growth. But how can either of Alberta’s two big cities be transformed into capital markets that can attract funds in such a short time? London took more than three centuries to become the financial centre it is now, and New York almost two centuries.

The point that needs to be underlined here is that we are in uncharted waters, not only in Alberta or in Canada, but globally.

The current circumstances impacting the global economy at this point in time have never interacted in history as they are doing today; previous growth models, development recipes, investment norms have lost most of their validity. For instance, finance has never controlled the economy to the extent it does today; capital has never been able to move so fast as it can today; labour productivity has never been as high; global trade has never been so vast in dimension.

Today’s woes require a lot of novel ideas and solutions. While they are all being developed, we have one vitally essential asset in our province: the ability to produce our own food and we have to make best use of it.