Thursday, May 29, 2008

the uneven effects of globalization

We are recently seeing a more refined effect of globalization, particularly in the larger economies. You know, this includes countries large enough to happen to have significant industries in several economic sectors – manufacturing, commodities, energy, services, consumer, industrial, IT….

This refined effect is - that in any one single country, a significant downturn in one of the major sectors of the economy need not mean a down-turn in the overall economy.

Let’s take the case of Canada. Canada is a large country. It has major industry clusters in all the economic sectors mentioned above. These clusters tend to be largely based in specific provinces. That’s why they are called clusters.

Manufacturing and industrial firms have mostly clustered around Ontario. Most likely, this is because they are a capital-intensive sector, and the financial sector has largely clustered itself in Ontario as well.

Oil and energy has largely clustered in Alberta– largely because there are significant chunks of oil-rich soil in Alberta. Materials mining has been more democratic. There are mines everywhere - from British Columbia, Yukon, Alberta, Saskatchewan, to Manitoba, Ontario, Quebec, all the way to the Atlantic provinces.

Now how are all these related to point above?

If you’ve been reading the newspapers lately, you know that we are currently experiencing a global rise in demand for oil and energy, for commodities, and for food. You know that prices for these have significantly shot up in the last few years. The steepest price climb has been in the last year alone.

This has significantly benefited all economies that happen to enjoy resource-rich lands, the likes of Alberta, and to a lesser extent, Saskatechewan. All over these provinces, per capita income has been going up, and with it consumption per capita has been going up, and as a significant after-effect, real estate in the provinces have been going up, as more people move into these booming economies, and speculators join the fray, by bidding up real estate prices, in anticipation of more people coming into these areas. Good for them.

Now you know also that there has been a significant down-turn in the manufacturing sectors of developed countries as a result of jobs going to lower-cost countries. In Canada’s case, this has largely been avoided previously by going into specific market niches where Canada enjoys significant technological advantage, and which requires jobs that deploy the local population’s superior skill sets.

Lately, manufacturing provinces such as Ontario and Quebec have been finding it harder to keep ahead. And this is now partly because of the successes of the resource provinces, such as Alberta and Saskatchewan.


Because though they all have their own distinct provincial characteristics and separate economic focus, they are still part of the same one country. And they all use the same currency. That means, a significant increase in the fortunes of one province will have a profound effect on the fortunes of the other provinces. Not necessarily for the better as well.

Because of the increased global demand fro the commodity products of Alberta and Saskatechan – oil, energy, materials, fertilizer for food production- Canada enjoys significant trade surplus coming from these provinces. Because of the trade surplus, Canada’s currency continues to ratchet up, as more money comes into the economy than out.

Because the currency is appreciating, over-all cost of Canadian goods in terms of other currencies is also going up. If your product happens to be an essential that is currently much in demand, such as those priduced by Alberta and Saskatchewan, all is still well and good. You will continue to move product. But if your product is the high-end manufactured good, such as those of Ontario and Quebec, you’re in trouble.

Because of the constantly increasing cost of basic commodities, countries around the word are now increasingly having to make an important allocation decision – whether to use the decreasing buying power of their local currency for the more essential goods, such as food, energy, and materials, or the relatively more luxury-oriented or discretionary items, such as cars, car parts, planes, etc .

Basics wins out every time. At least during times of scarcity.

Because Alberta and Saskatchewan continue incurring trade surpluses, the Canadian currency continues its rise, or at the least, doesn’t depreciate compared with the currencies of those countries that are net buyers of Alberta’s goods.

Because Canadian currency becomes more expensive as a result, Ontario’s and Quebec’s products look even more expensive. And this presents and even bugger hurdle for the sales arms of their manufacturing companies. It gets harder to move their manufacturing products. Manufactured products of countries with depreciating currencies become cheaper by comparison. Even Canadians on strict budgets (who wouldn’t be, in times high inflations such as this?) would rather buy the cheaper alternatives.

So, we see a situation where, the more successful provinces such as Alberta becomes, the drearier the future looks like for provinces like Ontario. Canada is like the ship that suddenly gets swept up in a rising tide. It could either completely topple over, or it can avoid completely toppling and sinking, if it finds a new equilibrium where one side is deeper under water, while the other side ends up reaching up much higher out of the tide’s way. Right now, at least, Alberta is that side higher out of harm’s way, Ontario is the one deeper in the water.

Many Ontarians could very well avoid an unemployed fate by moving out west to Alberta. Unfortunately, this is not for everybody. In a sinking ship, you don’t want everybody rushing and packing into one side, lest the ship topple over into that side and sink everyone. If everybody goes over to Alberta, the economy might just overheat, and this will result in too high unemployment, and greater inflation in that area. Everybody will just be more miserable vis-à-vis only the manufacturing people over in Ontario bearing all the misfortune.

What are Ontario and Quebec to do then? What are ways for them to cope without necessarily encouraging a mass exodus of people over to Alberta?

Well, if you cant move all the people, why not move some of the money?

Capital is generally known to move from a place of lower return to a place of higher return. So what Ontario and Quebec need to do is promise a greater return on people’s money than Alberta does. With that, investment should come to these provinces to fund future growth.

Easier said than done. Figuring out ways to grow is always hardest at just the time when you are experiencing a severe contraction. But thinking minds better set down to doing just that. The longer the contraction is allowed to go unabated, the harder it will be for these provinces to get back on even keel.

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