Fix the economy a step at a time

Dian Cohen May 21 1984

Fix the economy a step at a time

Dian Cohen May 21 1984

Fix the economy a step at a time


Dian Cohen

There is widespread concern among Canadians about the economic future of the country. There is practically as much concern among Canadians about their own personal economic future. Donald Macdonald, in the interim report of his royal commission, tells us there is no “easy fix” for what ails us. Statistics Canada tells us the rate of economic “recovery” is not sufficient to reduce our record levels of unemployment. It may sound naïve, but one of our problems seems to be that we are trying to “fix” the economy as though it were a machine with only one component. Trouble is, we cannot locate the broken mechanism.

Of course, the economy does not work that way, and we all know it. What we do not seem to know is how to approach the “fixing” when we are dealing with millions of people, hundreds of thousands of businesses and interdependencies beyond our borders and our control.

One way is to approach the fixings one at a time. Take one of the most recent examples of a part of the economy that is not working—the longstanding dispute between next-door neighbors Quebec and Newfoundland over the hydroelectricity generated at Churchill Falls. Resolution of the dispute requires understanding. Understanding requires a little background history. At this point, I should tell you that I am a director of Hydro-Québec so that you may judge the remainder of this column with that knowledge.

First, the Newfoundland perception. Newfoundland joined Confederation in 1949 as a less than enthusiastic and less than equal partner. Newfoundlanders have been extraordinarily sensitive about their economic development. They suffered the indignity of having to give up their self-governing status to Britain during the Depression. Joey Smallwood almost single-handedly convinced Newfoundlanders to join Confederation on the grounds that it would be beneficial. And so it has been—the Trans-Canada Highway across the province, the CBC, CN, Air Canada, transfer payments that provide family allowances and medicare and unemployment insurance. Great stuff if you are starving, hard to accept if you are proud and nationalistic and want to control the industrialization of your own province (read country). All the while, Newfoundlanders have been

turning out better-educated political leaders who have become increasingly inclined to articulate those views.

Brian Peckford was a prime example. He arrived as premier in 1979, capturing, in the words of Newfoundland writer Stephen Kimber, “a shared sense of general historical injustice and transforming it from a simple feeling of impotent inferiority to a powerful, aggressive demand for redress.” Economic independence for Brian Peckford meant finally getting control over fisheries, offshore oil and gas, and the hydro potential of Labrador.

Things have not worked out too well. Newfoundland lost the fisheries and the right to develop its offshore oil and gas. Labrador hydro and the Churchill Falls contract signed with Quebec appeared to be the last kick at the cat. The crux of the matter was that Newfoundland agreed in 1969 to sell virtually all the hydroelectricity from Churchill Falls to

4Newfoundland feels humiliated by Quebec, and Quebec feels misunderstood by the rest of the country’

Quebec at what, after OPEC’s rise, looks like an extraordinarily low price. The Supreme Court of Canada has just ruled that Newfoundland could not have the contract reopened unilaterally. Newfoundland is less than happy.

The Quebec perception is somewhat different. Back in the 1960s, when the possibility of developing hydroelectric power in Labrador was first broached, Newfoundland was unable to find either the financing or a potential customer. Alcan was not interested. Alcoa was not interested. Labrador was just too far away, transmission lines were too expensive, and so on.

A federal tax change in 1965 made Churchill Falls more attractive to Quebec, but still not overwhelmingly so, because it was deeply involved in developing hydroelectricity in the James Bay region, which was within its own political boundaries. Taking on Churchill Falls meant the postponement of projects already on the drawing boards—at considerable expense considering the inflation of the 1970s. (The first phase of the James Bay project—LG-1—would have cost $8 billion less had it begun in

1971 instead of 1979.)

But Quebec did take on Churchill Falls development, assuming all the risks of both the financing of the project, and the sale of any electricity surplus to its needs. With much of the money being raised in the United States, Hydro-Québec also assumed the risk that if the Canadian dollar fell below 92 cents U.S., it would pay the difference. Although rates at the point of actually going to the market to borrow could not be known, Hydro-Québec agreed to pay any difference between the market rate and 5 % per cent. (The actual rate obtained was 7% per cent.)

Quebec promised to advance money to complete the project in the event that the Churchill Falls Corp. could not raise enough. And Quebec contracted to pay for all the electricity generated, whether or not it could sell it. In exchange for taking all those risks— which at the time many Quebecers criticized as equivalent to buying a lottery ticket—Hydro-Québec required a 40year contract on the price of the energy. It is that contract that Newfoundland sought, and failed, to break.

Thus the two provinces are stalemated. Newfoundland feels betrayed by Ottawa and humiliated by Quebec. Quebec feels misunderstood by the rest of Canada (virtually all media coverage has depicted Quebec as the bully taking advantage of the virtuous little guy) and at a loss to understand why Newfoundland has refused all offers of conciliation (protracted negotiations in which Quebec offered several billion dollars more to Newfoundland in royalties and additional power delayed the Supreme Court decision for four months).

In fact, both provinces acknowledge that further development of Labrador will be of significant benefit to each of them. In fact, economic solutions are available. In fact, each province had decided before the Supreme Court decision that whichever won, it would offer to negotiate with the loser. In fact, the “winner,” Quebec, offered to begin talks with Newfoundland within hours of the Supreme Court decision.

“Fixing” an economy that is not working requires, in the first instance, understanding what has gone wrong. The next step is in really wanting to. How much pain and poverty do we need before we begin?

Dian Cohen is a Montreal-based economics writer.