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Walking the resource tightrope

There's often a gap between the ups and downs of the market and the real-world economy the rest of us inhabit, but this is ridiculous

From Thursday's Globe and Mail

Canada's real GDP has grown precisely zero per cent over the past six months. So far this year, unemployment has risen every month.

We're shouldering our first national balance-of-payments deficit in a decade. And you have to sell the family silverware these days to pay for a tank of gas.

Not exactly a rosy economic outlook. But somebody forgot to tell the red-suspendered guys down at the stock market about all this doom and gloom. They've been partying like it's 1999. They've driven the Toronto Stock Exchange composite index to four all-time record highs so far in May. Happy brokers are tallying bonuses and picking out new BMWs. And there's lots more steam left in this bubble.

It seems ironic, since stock markets are supposed to be forward-looking beasts that anticipate future changes. Yet even as the fundamental measurements of Canada's economic performance stagnate (and our major customer, the United States, slips deeper into outright recession), the stock market goes from strength to strength. There's often a gap between the ups and downs of this paper casino and the real-world economy that the rest of us inhabit, but this is ridiculous. What gives?

The answer, in a word, is resources. Prices for everything from oil to potash to rice to copper have smashed historical records this year. Especially oil. Companies that produce all that mundane stuff are reaping bucketfuls of money. And investors are trampling each other to get a piece of the action while the getting is good. One consequence is the rash of foreign takeovers of Canadian resource companies - that's driving up our loonie as fast as it erodes our national autonomy. Another is a stock market that reaches for the stratosphere while the rest of the economy barely stumbles along.

Indeed, Canada's stock market has become as heavily reliant on the prospects of a handful of superprofitable resource giants as it once depended on the whims of dot-com wizardry. The energy, mining and bulk-materials sectors today account for half the total market value of the TSX, compared to 30 per cent just four years ago. Without the dramatic rise in resource profits and share prices this year, the TSX would be falling (as U.S. markets have done), not setting new highs.

This run-up in resource stocks may not be quite as financially precarious as the dot-com bubble that preceded it (although it is worth recalling that, back in 2000, Nortel Networks accounted for the same share of the TSX as the energy industry does today). Nevertheless, our evident and growing reliance on the resource sector should give us all plenty of pause. Why are we so keen to take our eggs out of one failed basket, only to toss them all into another?

Our overdependence on resources is visible in many other indicators more important than the stock market - such as the share of our exports that comes from resource products (now almost 60 per cent, compared to 40 per cent in 1999) or the fact that the oil industry now undertakes almost one-fifth of all business capital spending (compared to 5 per cent in 1992).

Canadians have learned the hard way that digging stuff out of the ground and selling it to foreigners may be highly lucrative at particular junctures (including, obviously, the present), but it is no foundation for long-run prosperity. That stuff we are digging tends to run out. Or its price falls just as sharply as it rose.

Or scientists discover different, better stuff to use. Or we conclude that the social and environmental consequences of digging stuff are simply too immense to continue (a point which, hopefully, we'll soon encounter with the tar sands).

That's why governments of all political stripes traditionally tried to swim against the tides of resource-led development: regulating and taxing resource industries and fostering non-resource sectors through a mixture of tax, trade, and technology policies. This kind of thinking has fallen out of favour within today's market-dominated mindset, with a few noble exceptions (such as the Ontario government's efforts to maintain a world-class auto industry here).

By my reckoning, however, we'd better be looking beyond the resource bandwagon that's currently rolling down Bay Street - and thinking about what we'll do for a living once it's moved on.

Jim Stanford, an economist with the Canadian Auto Workers union, is the author of Economics for Everyone.

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