An OISD commentary;

inviting discussion and participation to build a better community.

Canada is not a planned economic system such as the former Soviet Union. Canada is a democratic governed mixed economy. In our system, quality of life and political stability depends on private investment from within and abroad into economic production in businesses that distribute real income and tax in the community via employment.

The government’s task in this system is to provide such products and services the private sector fails, or is unable, to provide. One such fundamental government responsibility is to monitor the allocation mechanism that distributes wealth in the community and to intervene before problems cause adversity, as is the case in the forest sector in British Columbia.

Society elects representatives to the legislature and pays taxes with the expectation that government and bureaucracy are meeting their responsibility to provide those services that the private sector is not providing. Voters expect their political representatives to ensure that BC’s economic and forest management systems provide jobs and stability while safeguarding the resource base for this and future generations.

Unfortunately, BC’s forest policies can only be described as a depressing example of government failure to meet its fundamental accountability to society. Serious issues in the pricing mechanism, allocation of resources and investment into economic production in business, were ignored for decades. These issues escalated into adversity causing irreparable harm to the community and are now the underlying causes of US countervailing actions.

With the Canadian and US economies so closely tied, both nations will end up losing in the current "softwood war". In Canada mills are closing, and in both countries good people are losing their jobs through no fault of their own. In the US, consumers end up paying a higher price for lumber. In addition, fewer exports from Canada to the US means increased imports to the common US-Canadian market from abroad, which ultimately fuels a combined US-Canadian chronic trade and current account deficit with the rest of the world. US and Canada lose while other trading blocks gain.

The BC forest sector is a semi-planned economic system, an alliance between politicians, government, unions, and industry. The state owns more than ninety percent of the land, and a system of tenure allocates the forest to corporations in exchange for ‘stumpage’ fees.

Since government depends on the stumpage fee for general revenue, it has a stake in stimulating harvesting irrespective of market conditions. Industry, on the other hand, is able to generate profit from the sale of raw or semi-manufactured lumber - and with government cooperation, can lower prices to promote sales. There is little incentive to add value or develop long-term sustainability.

This system effectively eliminated all competition and guaranteed industry access to a supply of cheap timber, thereby eroding natural market allocation and pricing mechanisms. This subsequently eliminated the incentive to recognize and adapt to the new conditions in the economy and marketplace, and allowed industry to substantially ignore ecological and sustainability issues.

The result was that the BC forest industry failed to identify and address the economic and market shift from the resource-driven post and Cold War conditions to a knowledge-driven open economy with increased competition.

During the good times, the system failed to encourage long-term investment, adding value, using fewer resources and developing new markets. During the bad times, it stimulated industry to expect government assistance and bailouts.

The reality is that crown ownership of land, the system of tenure, the $2.5 plus billion expenditures of Forest Renewal BC and other government and semi-government transfer programs, all failed to address the underlying problems.

Government policies and programs did not identify or address the core issues and subsequently contributed further to the problems. The focus on tax transfers and subsidies continued to erode the free market allocation and pricing mechanisms, increased dependency on government assistance to solve problems, and hampered BC’s competitiveness. That is what created a series of long-term problems for BC, which continues to erode economic production and quality of life.

Members of the community continue to volunteer time and effort to sit on committees and advise paid politicians and bureaucrats on what they are paid to know, and on what they should have done many years ago. Politically, an old method of avoiding accountability is to ensure that nobody is accountable.

The crime is that the core problems have been well known within the BC political, bureaucratic and academic establishments since the seventies. Politics, tax transfers and industry contributions to research took precedence over economic, social and ecological reality. It was easier to take short-term politically neutral decisions and to support policy that maintained the status quo. Advice from outside of government was ignored or dismissed and bureaucrats participated in executing the policies – sometimes despite their better judgment.

The systemic government failure to detect problems in the allocation mechanism and in the government’s own programs - and to take necessary action - is a failure of our democratic system. Ironically, it is US countervailing action that addresses these problems.

The current government’s approach to solve problems with tax and spending cuts and cost-benefit reviews is vital, but is also oversimplified. BC’s current problem is not only a tax and spending problem - it is also a revenue problem. Using spending and tax cuts to stimulate investors at home and abroad to invest in economic production, may have worked in the economic and market conditions of the early and mid nineties. However, it may not work as well to day.

Keeping election promises is a virtue that voters seem to value, but BC’s future depends on government understanding and solving the hindrances to economic production, investment, and revenue. The Captain of the Titanic’s response to warnings of icebergs was to stay on course. What should worry the ‘passengers’ of BC is that so far, there is no indication that the current government recognizes the underlying systemic problems that hamper private investment in economic production in BC. Provincial and federal government intervention in the regional and local economy lacks prudent analysis and continues to overlap - adding to the problems.

The underlying problems in the forest industry remain unsolved and will continue to cause hardships for ordinary people. The BC government needs to repair the allocation and pricing problem in the economy, and not only in the Forest Sector, and that includes ensuring that federal intervention in local economies in BC, addresses this underlying problems. Unsolved, the allocation problems will continue to hamper investment in economic production. That is Government, not the private sectors task to solve. It is unclear if the government fully understands the issues.

What seems to be lacking is prudent analysis that identifies and formulates solutions to the long and short-term core economic, market, organizational and behavioral issues.

OISD’s founding analysis is that government must change from its reactive approach to a more proactive approach to issues. Society cannot continue to allow decades of known strategic economic, social and ecological issues to escalate before taking action. Whether in the forest sector, Western Star in Kelowna, BC health care, education, water quality or other areas of the economy, we cannot afford to leave problems unsolved.

OISD offers independent non-political and non-partisan research and analysis into strategic issues facing society -- promoting discussion leading to best practices and solutions. OISD will also arrange conferences, training and seminars in issues related to the institute’s purpose and research.

This commentary invites discussion and participation in OISD and promotes funding into OISD research projects and operations.

OISD invites government, private sector and individuals to participate within the standards published on the OISD’s website.www.oisd.ca

Okanagan Institute of Strategic Development

December 2001