Returning British Columbia to Prosperity

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Economic Performance

This first section of Returning British Columbia to Prosperity assesses the economic performance of BC over the last quarter-century. It places particular emphasis on British Columbia's relative performance with Ontario and Alberta and also with Canada as a whole. This section is meant to provide readers with an understanding of the province's past and current economic performance.

Three core areas of the economy have been selected for analysis: income, employment, and investment. These three core areas provide readers with an adequate picture of British Columbia's economic performance over the last 25 years. Some of the areas assessed in this first section are also examined in later policy sections.

Income Performance: Signs of Deterioration—The Lost Decade

This study uses two principal measures to assess British Columbia's performance in expanding the income of the province's residents: the gross domestic product (GDP) and disposable income. Gross domestic product (GDP) refers to the total value of goods and services produced. Disposable income is a measure similar to GDP except that it only includes the amount of income available to citizens after deductions for direct taxes, such as income taxes and payroll taxes. This study will examine both income measures in a number of different ways to provide multiple views of income performance for both GDP and disposable income.

Gross Domestic Product: Lagging Performance

Aggregate Real GDP

The simplest way to view GDP is in aggregate. That is, to inquire as to what changes occurred in the total, or aggregate, value of goods and services. Economic Figure 1 depicts the changes in real GDP between 1975 and 2000 for British Columbia, Alberta, Ontario, and Canada as a whole.

As Economic Figure 1 indicates, British Columbia fared well compared with Ontario and Canada as a whole for the entire period from 1975 to 2000 in terms of growth in the total real value of goods and services (GDP). British Columbia's real GDP growth in the period exceeded that of Ontario by 3.4 percentage points, and was only 7.7 percentage points lower than Canada as a whole. Alberta far and away outperformed all of the jurisdictions over this period, recording growth in GDP 79.6 percentage points greater than the next highest jurisdiction, Canada as a whole. Alberta's growth was so strong that it actually overtook British Columbia in terms of the total size of its economy in 2000.

British Columbia performed particularly well between 1975 and 1990. Total real GDP growth in British Columbia exceeded that of Ontario, and was only 1 percentage point lower than in Canada as a whole. Again, Alberta's GDP growth far exceeded that of any other jurisdiction during this time.

As Economic Figure 1 depicts, all jurisdictions experienced a slowdown in GDP growth during the 1990s. British Columbia, unfortunately, experienced a more pronounced decline in its real GDP growth. Between 1990 and 2000, British Columbia's GDP growth lagged behind all three other jurisdictions. In fact, in an analysis of real GDP growth between 1992 and 1999, the Business Council of BC concluded that British Columbia ranked second last among all the provinces in its ability to increase economic output (Business Council of BC, 2000b).

Real Per Capita GDP

Examining changes in total GDP can be overly simplistic. For instance, it ignores changes in population. It is entirely possible that GDP could be increasing while the residents of a particular region are becoming poorer. This would occur when growth in GDP was insufficient to account for growth in population. Per capita GDP figures and per capita disposable income data will provide evidence that that is exactly what has occurred in British Columbia over the last decade.

Economic Figure 2 illustrates the real per capita GDP values for Canada as a whole, Ontario, Alberta, and British Columbia between 1975 and 2000. Like the previous figure, the tremendous growth in per capita GDP in Alberta stands out. From 1975 to 2000, real per capita GDP grew 74.6 percent in Alberta, which was significantly greater than in Canada as a whole, Ontario, or British Columbia, which experienced 57.5 percent, 41.6 percent, and 24.2 percent growth, respectively. Put differently, the growth in real per capita GDP in British Columbia between 1975 and 2000 was roughly one-third that of Alberta and less than half that of Canada.

In 1975, the real per capita GDP values for the four jurisdictions were relatively similar: Canada ($18,949), Ontario ($23,521), Alberta ($20,597), and British Columbia ($21,246). British Columbia's real per capita GDP was $2,297 greater than the national average, and $649 greater than Alberta's real per capita GDP. Like most regions, British Columbia lagged behind Ontario in its real per capita GDP in 1975. Nonetheless, there was a relatively small disparity ($2,275) between these two "have" provinces.

In 1990, British Columbia's real per capita GDP ($25,834) remained above the national average, although by only $367. The spread between the real per capita GDP values for British Columbia and Ontario had widened, and Alberta now surpassed BC. Neverthelss, British Columbia remained competitive. Specifically, Ontario's real per capita GDP ($28,530) exceeded British Columbia's by $2,696 while Alberta's real per capita GDP ($28,383) exceeded British Columbia's by $2,549.

The serious under-performance of British Columbia in expanding real per capita GDP occurred between 1990 and 2000 (see also Economic Figure 3). While Canada as a whole, Ontario, and Alberta posted respectable rates of growth in real per capita GDP, namely, 17.2 percent, 16.7 percent, and 26.7 percent respectively over the ten-year period, British Columbia lagged with a growth rate in real per capita GDP of 2.1 percent.

This lacklustre growth rate has resulted in serious gaps in real per capita GDP values between jurisdictions. For instance, British Columbia's real per capita GDP of $26,383 in 2000 is $3,471 less than the national average, and considerably less than the comparable values for Ontario and Alberta—$33,295 and $35,969, respectively. In fact, British Columbia now maintains real per capita GDP values at 79.2 percent and 73.3 percent of Ontario and Alberta, respectively.

As Economic Figure 3 illustrates, British Columbia posted moderate but nonetheless competitive rates of real per capita GDP growth between 1975 and 1979 and between 1985 and 1989. Growth in real per capita GDP in British Columbia between 1975 and 1990 totalled 21.6 percent, slightly more than in Ontario (21.3%) but less than in Alberta (37.8%) and Canada as a whole (34.4%).

British Columbia suffered major declines in real per capita GDP between 1980 and 1984 while other provinces experienced increases. However, the most significant divergence in growth in real per capita GDP values between the jurisdictions occurred over the last decade. British Columbia posted the second worst growth rate between 1990 and 1994 and experienced the worst growth rate between 1995 and 1999. BC's dismal performance in the 1990s in growing the real value of per capita GDP has been disappointing given the province's enormous potential.

What the Future Holds: Conference Board and CIBC Estimates

According to Conference Board of Canada estimates, British Columbia will continue to lag Canada as a whole as well as Ontario and Alberta for 2000 and 2001. British Columbia is expected to post gains in real GDP of 2.8 percent and 2.9 percent respectively, for 2000 and 2001, well below the rates expected for Canada (4.2% and 3.0%), Ontario (4.6% and 3.2%), and Alberta (5.8% and 3.4%) (Conference Board of Canada, 2000).

Recent projections by the Canadian Imperial Bank of Commerce (CIBC) support the Conference Board of Canada estimates. CIBC expects GDP growth in British Columbia to lag behind Canada as a whole and both Ontario and Alberta in 2001 and 2002 (CIBC, 2000c). The consensus view for GDP growth in British Columbia is positive but still significantly below that of both of the other "have" provinces as well as Canada as a whole. In other words, British Columbia is not expected to regain its position as one of Canada's leading economic jurisdictions.

Disposable Income: From Bad to Worse

Aggregate Real Personal Disposable Income

Recall that personal disposable income measures personal income adjusted for direct personal taxes to provide a measure of income available to residents. Economic Figure 4 presents the growth in real personal disposable income between 1975 and 2000. British Columbia performs better using this measure than using real GDP growth (Economic Figure 1). Although Alberta significantly outperforms all other jurisdictions over this period, British Columbia consistently outperforms both Ontario and Canada as a whole. For instance, over the entire period (1975-2000), real personal disposable income in British Columbia grew 91.7 percent whereas it grew 68.7 percent in Canada as a whole and 74.2 percent in Ontario. Alberta outperformed all jurisdictions in growth in real personal disposable income with a rate of 123.5 percent.

Real Per Capita
Disposable Income

Like aggregate GDP, viewing aggregate disposable personal income can be too simplistic as it ignores important factors such as population growth. As was the case for aggregate GDP, once disposable personal income is adjusted to account for population changes, BC's performance seriously deteriorates. Economic Figure 5 depicts real per capita personal disposable income for the four jurisdictions between 1975 and 2000.

Economic Figure 5 contains two noticeable details. First, Canada as a whole, Alberta, and British Columbia begin the period with nearly identical levels of per capita personal disposable income. In fact, the difference in real per capita personal disposable income between the three jurisdictions is a mere $560, with British Columbia maintaining the highest level ($16,563) of the three jurisdictions and Canada as a whole the lowest ($16,003). In 1975, Ontario maintained a real per capita personal disposable income of $17,759, materially above all three jurisdictions.

The second observation is the tremendous growth experienced by both Alberta and Ontario compared with BC's abysmal performance. British Columbia ends the period with the lowest real per capita disposable income ($19,666) of the four jurisdictions, $768 below the national average of $20,434, and significantly below the levels achieved in either Ontario ($22,211) or Alberta ($22,119). In fact, British Columbia's real per capita disposable income is now 88.5 percent of Ontario's and 88.9 percent of Alberta's.

The major difference in per capita disposable income growth occurs largely over the 1990s, as Economic Figure 6 shows. British Columbia performs relatively well between 1975 and 1990, excluding 1980 to 1984. In fact, the relative total growth rates for this 15-year period are much closer to each other than those achieved in the last decade. For example, while Ontario and Alberta posted growth rates in per capita disposable income between 1975 and 1990 of 23.3 percent and 29.9 percent, respectively, British Columbia experienced growth of 25.7 percent. Unfortunately, this competitive performance was not continued in the 1990s.

British Columbia's performance in expanding real per capita personal disposable income between 1990 and 2000 was disastrous (Economic Figure 6). From 1990 to 2000, only BC experienced a net reduction in real per capita personal disposable income—a decline of 5.9 percent.

The three other jurisdictions all posted positive gains between 1995 and 2000, enabling them to end the decade with a net gain in real per capita personal disposable income. A 2000 report by the Business Council of BC examining economic performance concluded that BC's performance in disposable income for most of the 1990s ranked dead last among the Canadian provinces (Business Council of BC, 2000b).

What the Future Holds: Conference Board Estimates

According to the Conference Board of Canada, British Columbia will continue to lag all three jurisdictions in personal disposable income growth in 2000 and 2001. The Conference Board expects personal disposable income in BC to grow by 5.4 percent and 4.6 percent in 2000 and 2001, respectively. This is generally below the levels estimated for the three other jurisdictions: Canada (6.1% and 4.6%), Ontario (6.8% and 4.8%), and Alberta (6.5% and 5.4%) (Conference Board of Canada, 2000).

Income Performance Conclusion

Two observations emerge from the GDP and disposable income data presented above. The first is that British Columbia competed relatively well with both of the other "have" provinces, namely Alberta and Ontario as well as with Canada as a whole between 1975 and 1990 in increasing the income of its citizens. For instance, British Columbia consistently maintained per capita incomes above the national average and its growth rate was generally competitive.

The second observation is that British Columbia's performance in increasing its residents' incomes over the last decade has been appalling. British Columbia now maintains income levels below the national average, and well below those achieved in the two other "have" provinces. In fact, BC's income growth ranked near the bottom of the provinces. Given the province's economic potential and its historical income levels, the performance of the last decade has been unacceptable.

II. Employment Performance: A Bright
Spot?

Another important measure of economic performance is a jurisdiction's ability to generate employment growth and, thus, to minimize unemployment. Given British Columbia's disastrous performance in income growth, some of the province's employment statistics are surprising.

Employment and Unemployment

Employment Growth

Economic Figure 7 depicts average employment growth for the five five-year periods between 1975 and 1999. British Columbia was competitive with the other jurisdictions over the five periods. In fact, BC recorded the highest growth rates in employment for both the 1985-1989 and the 1990-1994 periods.

Total employment growth between 1975 and 2000 in British Columbia (96.3 percent) exceeded employment growth in either Ontario (64.2 percent) or Canada as a whole (61.0 percent). It trailed Alberta only slightly, which led all jurisdictions in employment growth with a 102.2 percent increase between 1975 and 2000.

Equally surprising, given British Columbia's poor income performance over the 1990s, is its strong employment growth over the same decade. As noted, British Columbia led all jurisdictions over the 1990-1994 period and fared reasonably well between 1995 and 1999. In fact, British Columbia led all four jurisdictions over the entire 1990 to 2000 period with employment growth of 25.6 percent, compared with 14.2 percent in Canada as a whole, 13.1 percent in Ontario, and 24.6 percent in Alberta.

Unemployment Rates

Given the employment figures above, it is not surprising that British Columbia's unemployment rate has been competitive with that of other jurisdictions. Economic Figure 8 depicts the average unemployment rates for the five five-year periods between 1975 and 1999. Between 1975 and 1989, BC had a higher unemployment rate than the national average. The province's unemployment rate then dropped below the national average for both the 1990-94 and 1995-1999 periods.

Public Sector Employment:
Part of the Story

Given British Columbia's poor income and growth performance, its employment performance is quite surprising. How can the province's strong performance in generating employment be reconciled with its poor income and growth performance? Several mitigating factors at least partially explain this paradoxical outcome.

One explanation is British Columbia's strong population growth. The Business Council of BC concluded that "much of the job growth in BC in the 1990s has been directly tied to the province's expanding population" (Business Council of BC, 2000b, p. 3). An increasing population helps employment because it creates an increased demand for a wide range of goods and services. As the income section explains, over the 1990s British Columbia experienced increasing aggregate GDP and disposable income largely due to increases in population. Clearly, immigration and Canadian migration to British Columbia helped the province post positive employment gains during the 1990s.

Another explanation for this phenomenon is public sector employment growth. Economic Figure 9 shows the number of public sector employees for Ontario, Alberta, and British Columbia from 1983 to 2000. The decline in the number of public sector employees in Alberta and Ontario is evident. Although the current number of public sector employees in Ontario (941,000) is still above the 929,000 employed in 1983, it is significantly down from its peak in 1991 of 1.09 million. Similarly, Alberta has actually reduced the number of public sector employees from 279,000 in 1983 to 257,000 currently.

British Columbia, on the other hand, has increased the number of public sector employees in the province. Since 1983, the number of public sector employees in BC has increased by 22.2 percent, from 283,000 in 1983 to 345,000 in 2000. The Business Council of BC concluded that the bulk of new jobs created in the province between 1996 and 1999 were in the broadly defined public sector (Business Council of BC, 2000b). In fact, it cautioned that "comparatively few BC companies have been adding to their full-time payrolls" (Business Council of BC, 2000b, p. 3).

Economic Figure 10 illustrates the percentage of total employment represented by the public sector. For all four jurisdictions, the percentage of the labour force comprised by the public sector has been decreasing since its peak in the early 1990s. Unfortunately, British Columbia still has a relatively high proportion of its labour force in the public sector. BC begins the period with the second highest proportion of its labour market in the public sector relative to the other two "have" provinces, and ends the period with the highest proportion. Specifically, while in Ontario and Alberta public sector employment declined as a percentage of total employment (from 20.5 percent and 22.0 percent, respectively, in 1981, to 16.0 percent and 16.1 percent, respectively, in 2000), in British Columbia public sector employment dropped (as a percentage of total employment) to a much lesser extent. As a percentage of total employment, British Columbia's public sector has declined from 21.5 percent in 1981 to 17.7 percent in 2000, which is nearly 2 full percentage points greater than either Ontario or Alberta.

It is questionable whether such an expansion in the number of employees and the muted reduction in the percentage of total employment in the public sector is sustainable. As the spending section will discuss, the BC government currently faces a serious crisis in its spending levels. Tthe absolute number of public sector employees as well as the percentage of total employment represented by the public sector will have to be curtailed further as part of a rationalization of government spending.

What the Future Holds: Conference Board and CIBC Estimates

According to Conference Board of Canada estimates, British Columbia will continue to lag Canada as a whole and both Ontario and Alberta in employment growth and unemployment for 2000 and 2001. The Conference Board expects employment growth in BC of 2.4 percent in 2000 and 1.9 percent in 2001. This is near or below the levels of employment growth expected in Canada (2.9% and 1.8%), Ontario (3.2% and 2.1%), and Alberta (2.5% and 1.8%).

Estimates for employment growth by CIBC for the four jurisdictions for 2000, 2001, and 2002 are similar to the Conference Board's. It expects employment growth as follows: Canada (2.6%, 2.0%, and 2.5%), Ontario (3.0%, 2.0%, and 2.6%), Alberta (2.3%, 2.4%, and 2.3%), and British Columbia (2.2%, 2.0%, and 2.0%). CIBC expects that at best, employment growth in British Columbia will match the levels in other jurisdictions in 2001, but will return to lower levels in 2002 (CIBC 2000c).

Equally troubling, the Conference Board of Canada expects BC to maintain higher rates of unemployment than all three other jurisdictions for 2000 and 2001. CIBC's unemployment estimates echo the view that under-performance is expected in British Columbia for 2000, 2001, and 2002. The Conference Board expects British Columbia's unemployment rate to increase from 7.1 percent in 2000 to 7.3 percent in 2001 while all three other jurisdictions are expected to have stable or lower rates of unemployment. Specifically, both Canada and Ontario's unemployment rates are expected to remain constant at 6.6 percent and 5.3 percent, respectively. Alberta's unemployment rate is expected to decline from 4.9 percent in 2000 to 4.8 percent in 2001 (Conference Board of Canada, 2000). Again, CIBC's unemployment estimates support the Conference Board's estimates. CIBC expects British Columbia's unemployment rate to exceed the rates of Canada, Ontario, and Alberta for 2000, 2001, and 2002 (CIBC, 2000c).

III. Investment Performance: Lack of Confidence

Another critical area of economic performance is business investment. Investment in plants, equipment, and new technologies offers the potential to increase worker productivity and thus, ultimately, real wages. It is also a barometer of future economic prosperity since such investments provide the foundation for future production.

Economic Figure 11 depicts the growth in real net business investment between 1985 and 1999. The data presented are net of depreciation. That is, the data represent the real growth in investment after accounting for the replacement of current fixed assets such as plant and equipment.

British Columbia performs quite well in expanding real net business investment between 1985 and 1989. Although well below the average growth in the level of investment recorded in Alberta, British Columbia nonetheless experienced a 27.6 percent average increase in the amount of real net business investment over the period—higher than both Ontario and Canada as a whole.

Unfortunately, the last decade has seen a net reduction in the amount of business investment in the province. That is, the level of investment in BC has not kept pace with the depreciation of past business investment. On average, net business investment shrank by 0.4 percent between 1990 and 1994, and decreased another 4.2 percent between 1995 and 1999. Both Ontario and Canada as a whole experienced more pronounced declines between 1990 and 1994 but both recovered in the 1995-1999 period. Alberta alone posted strong and consistent growth in net business investment over the entire period. The Business Council of BC, in its 2000 report on economic performance in British Columbia, concluded that the "weakness in private sector investment over the past number of years lies at the heart of BC's economic malaise" (Business Council of BC, 2000b, p. 4).

Part of the poor performance in business investment is due to the harsh business climate that currently exists in the province. Economic Figure 12 depicts the 2000 results for the investment climate survey of investment managers. The survey, which asks senior pension and investment fund managers to rank the investment climates of the various provinces, indicated a continued negative view of British Columbia. BC ranked last among the ten provinces for the second year in a row (Clemens and The Fraser Institute, 2000).

One of the side-effects of this anti-business climate has been a serious deterioration in the province's corporate development, particularly in Vancouver as a location for corporate headquarters. Calgary—not Vancouver—has become the business choice for corporate headquarters in Western Canada (Clemens and Emes, 2001). This has occurred despite Vancouver's better access to the US and Asia, a well-developed port, and a more temperate climate. It is clear that part of the reason for Calgary's attractiveness must be rooted in public policies. It will require a concerted effort to return Vancouver to a position of favour for corporate headquarters.

Asian Flu and Commodity Prices: Red-Herrings

Many people have attributed BC's poor economic performance to two external events: the downturn in Asian economies and the decline in commodity prices. The collapse of some Asian economies coupled with the decrease in commodity prices may have worsened the economic situation in British Columbia, but they cannot explain the last decade's long-term, downward trend in economic performance.

It is popular to explain away British Columbia's lack-lustre economic performance over the last decade by blaming the downturn in the Asian economies. There is little disagreement among economists that BC's economy is more dependent on trade with the Asian economies than any other Canadian province. However, this is not the sole explanation for BC's poor performance, as the deterioration in the Asian economies occurred well after the decline in BC's economy began.

The full collapse of the Asian economies did not occur until the second quarter of 1997, with initial signs of the collapse emerging earlier that same year. For example, Sammi and Hanbo Steel (a Korean chaeobol and conglomerate respectively) collapsed in January and March of 1997, respectively. Thailand first felt the effects of a looming financial crisis with the failure of Finance One, the country's largest finance company in May 1997 (Shahabi-Azad, 2000). It is, therefore, difficult to explain an economic decline which began in the early 1990s with a crisis in the Asian economies that occurred in 1997 and 1998. Nonetheless, the downturn in the Asian economies did exacerbate an already difficult economic environment in British Columbia.

Another popular explanation for BC's economic downturn is the dramatic drop in commodity prices, particularly prices for pulp and paper in the 1990s. However, just as the downturn in the Asian economies exacerbated but did not create a bad economic environment in British Columbia, the decrease in commodity prices is not solely responsible for the province's poor economic performance.

Economic Figure 13 presents a broad measure of commodity prices, expressed as an index value, and GDP growth rates over the last 25 years. The commodity price index includes all raw material inputs such as oil, gas, minerals, and other natural resource products. As Economic Figure 13 shows, there is little relationship between rates of GDP growth in British Columbia and aggregate commodity prices. The correlation value for the two series over the time period was 0.0394, which indicates no correlation. In fact, between 1993 and 1997 the two series were negatively related. That is, as GDP declined over the period, commodity prices actually increased.

Economic Figure 14 presents a similar analysis of pulp prices, specifically northern bleached softwood pulp and GDP growth rates between 1980 and 1999. There is a weak relationship between BC's economic growth rate and pulp prices between 1980 and 1999.¹ It is important to recognize, however, that there are periods when the two series move in opposite directions. For instance, between 1993 and 1995, pulp prices increased dramatically while the province's economic growth declined. Similarly, between 1995 and 1997, pulp prices decreased while the rates of economic growth in the province increased.

Although the downturn in the Asian economies and the decline in commodity prices clearly aggravated an already difficult economic environment in British Columbia (particularly in regards to forestry products), they cannot explain the larger downward trend in economic performance which began in the early 1990s.

Conclusion

Whether assessed according to GDP, disposable income, private sector employment, or business investment, British Columbia has clearly experienced a difficult decade. Far from being external to the public policies enacted in the province, the decline in economic performance is directly attributable to poor public policies, as later sections will illustrate. The path back to prosperity will be difficult and will likely result in painful displacements. However, the gains from such reforms will be significant.

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