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Why Alberta Needs a Diversified Economy, and 3 Ways We Can Get There

03/10/2013 04:41 EDT | Updated 05/07/2013 05:12 EDT
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The Alberta government is facing a deficit in the area of $4 billion. By now we have all heard the discussions regarding the recommended courses of action that the government should take to make sure that Alberta's finances get back into the black; reform Alberta's taxation system (although the budget saw no such reforms), cut government spending, and diversify Alberta's energy export markets. All of these will certainly be needed in the short term, to some degree or another, to get Alberta's finances back on stable footing. However, all of the above are just that, short-term solutions to a more systematic issue facing Alberta's economy. University of Calgary economist Ron Kneebone was right to suggest that the real issue at hand is "the [provincial] government's historic reliance on resource revenues to bankroll its operations". Instead, what is needed to mitigate the economic risks associated with being a resource- based economy is a sustained focus on diversifying Alberta's economic base. This will be a complex and challenging task (as it is for most resource-based economies), however placing focus on areas that build off of Alberta's current economic strengths, that make it easier to set up a small business, and that increase investment in arts and culture are sure to go a long way in achieving this goal.

In terms of existing economic strengths, the Shaping Alberta's Future report suggested that two such areas are those of service sectors relating to the energy industry, as well as the field of medical and biotechnology. In the case of the former, the report suggests that Alberta has developed a robust service sector that has supported the development of the energy industry, specifically in areas relating to drilling, upgrading, refining and construction. There is export potential with these services, as countries such as Russia, India and China seek to develop collaborative projects in securing energy resources for their developing economies. As for the latter (medical and biotechnology), recent years have seen significant investment in modern facilities and equipment at Alberta universities and medical research centres. This has resulted in the development of expertise in areas relating to medical sciences, especially in cardiovascular health, brain development, diabetes, biomedical technologies, infectious diseases, as well as bone and joint health. The Shaping Alberta's Future report also indicates that with expertise in such fields, there lies the opportunity for the establishment of biotech firms, and for their eventual growth and integration into major distribution centres and channels. Consequentially, developments in these fields could also result in opportunities for cross over applications. For example, opportunities could arise where energy sector technology could be applied to medical practices, such as improving medical imaging.

On the topic of existing strengths, Alberta already contains a strong culture of entrepreneurship. This culture could be cultivated by making it easier for Albertans to start and grow a small business, whether it is in energy sector consulting or the medical industry (among others). One way to help encourage the establishment and development of small businesses would be to provide a 0% small business tax rate for all new business start- ups, for their first three years. This would help alleviate the financial risks that many non-resource sector startups have, as they often have long gestation periods before they become profitable. Further, the Alberta government could look into the establishment of a research institute devoted to technological development fit for the marketplace. Again this idea was floated around in the Shaping Alberta's Future report, in the form of an Albertan Institute for Advanced Technology (AIAT). The report suggests that the role of such an institute would be to "focus on commercially oriented innovative research... and attract entrepreneurial scientists and postgraduates who will use that research to create new products, processes, services and companies". Essentially such an institution would have the focus of developing commercial/industry specific technologies, and allowing for a smoother transition of such technologies to the marketplace. It would also mitigate the capital risks that many small and startup companies have in working with new (and perhaps commercially unproven) technologies. (Hopefully this is similar to the umbrella organization Finance Minister Horner referred to in his budget; "dedicated to unleashing more robust collaboration throughout Alberta's post-secondary education, research, innovation and technology commercialization system...")

Lastly, no one should underestimate the economic return of proper investment in Alberta's arts and culture industries such as film, music and photography (among others). Promoting Albertan artists, both nationally and globally, can be achieved through providing tax breaks to those involved in creative industries, as well as ensuring that they receive stable and predictable funding. Not only would this diversify Alberta's economy by developing a new (economic) sector, it would also serve to attract a broader range of human capital to Alberta's communities. (Yes, Alberta's communities already offer great lifestyles, as those of us fortunate enough to reside in them already know, but the broader the range of human capital we are able to attract, the better.) Diversified human capital would result in Alberta's workforce containing a diversified set of skills, interests and ideas, which in turn could attract investment from different economic sectors, specifically from those outside resource extraction industries.

Perhaps the biggest challenge facing future budgets will be to invest towards economic diversity in a fiscally responsible manner. With the Redford government currently facing a deficit, bold and innovative policy will be needed to development new economic sectors. Achieving this will require leadership, vision, as well as short-term sacrifices in the name of long-term gains. This needs to be asked of not just from our political leaders, but from our business and community leaders as well. We as Albertans have achieved this before. Remember that, under the leadership and vision of Peter Lougheed, the oil sands required significant public investment before they became profitable. The consequences of not doing anything in this regard could be dire for future generations of Albertans. Even with projections that indicate that our natural resources (specifically those relating to energy) are still plentiful, the fiscal consequences associated with the bitumen bubble should serve as a warning to the Alberta government that the simple presence, and even global demand for our resources will not guarantee that we will receive a profitable return for them. To quote Sheik Yamani, former oil minister of Saudi Arabia; "the Stone Age did not end for lack of stone, and the Oil Age will end long before the world runs out of oil." Fortunately, despite the various challenges that resource based economies face in terms of diversification, we in Alberta possess the necessary human, (and for the time being) financial and natural resources needed to diversify our economy. However, simply focusing on spending cuts, tax increases (even if the budget did not contain any), and Alberta's energy exports will inevitably result in long-term deficits, and the inevitable disappearance of the Alberta advantage.