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GGR221 Lec 2

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Deborah Leslie

Lec 2 Staples Theory and Canadian Resource Sectors January-12-14 1:01 PM Primary - resource industry Staples Theory Staples Theory and the Forest Industry in B.C. W. A. McIntosh: "Canada is a nation created in defiance of geography" - Natural flow of goods and services was North - South John A. Macdonald's National Policy of 1870s designed to strengthen east-west linkages - Contradictory fo the N-S bonds a) Tariff barrier b) Transcontinental railroad (this would help facilitate trade and strengthen East-West ties) - no ties id as close and tight as canada to USA Harold Innis - 1950s - Referred to most distinguished geographer - Taught at UofT, political economy (politics and economics was once considered the same thing) - Economist, only Canadian to be president of economic association in USA - Need theory sensitive to historical and geographical context, a 'dirt economics' ○ Argued that economic theory should be embedded in adapted to local context - Theories that were developed in the old world, might not be suited to understand younger country like Canada - Canada's history can be understood in terms of a series of staples: fur, fish, timber, grain, minerals, oil and gas ○ Whole history is about shipping those staples ○ Staple exports - Staple = a principle item of trade or consumption produced and consumed by a society ○ Item that is traded, produced or consumed ○ Raw material or resource ○ Unprocessed or semi-processed primary resource (e.g. banana, wheat,.. Semi-processed = lumber, paper) - Staples production = primary resource activities and primary manufacturing activities in which resources are major inputs to the production process ○ e.g. pulp and paper, lumber ○ Furniture - added design and other inputs (not part of primary resource) - Innis argues: ○ Canada's history focuses on resource production and staples export - Staples economy = "a region that depends primarily on the export of raw and semi-processed materials to a more advanced manufacturing economy" (Pat Marchak) ○ Dominant trading partner = USA ○ Supply them with raw materials (recently most popular: oil and gas) ○ Economy where resources are the main sector ○ Economic development is conceptualized a process of diversification around this resource base/industries ○ Start with resource and over time that economy will diversify - In conventional accounts, spread effects of sector realized through 4 types of linkages a) Backward linkages - e.g. industries that supply machinery, or industries that supply logging equipment - linkages to firms that supply inputs (not necessarily machinery, could include human inputs, expertise) - e.g. geological firms, GIS companies (mapping forest resources), software firms, lawyers - help resource companies to extract resources b) Forward linkages - e.g. furniture industry - take a staples industry (ie. Lumber), and turns it into a high-value product (chair or table) c) Final demand - e.g. logging community, loggers buy goods and services - resource sector stimulate these demand and help to diversify local demand community d) Fiscal linkages - government uses tax earned to build infrastructure - help stimulate growth - Economy diversifies - However 2 basic impediments stem from staples production a) Export mentality - Extract raw material, ship abroad immediately - Too easy to make money exporting goods b) Firms are often large, oligopolistic, foreign - Cost expensive - Require lots of money to undertake a certain project (e.g. logging..) - Only few firms dominating in that sector (oligopolistic) - Foreign firms = hq is located somewhere else □ Research and development is located somewhere else - According to Innis: Cyclonics = result is susceptible to volatile resource prices and market demand, crisis Lectures Page 1 ○ Cyclonics = result is susceptible to volatile resource prices and market demand, crisis - Boom and bust cycles - World crisis of world economy - Resource economy is dependent on the fortune of other countries that are - Like a cyclone - sucks up resources, and moves on - Metaphor of cylcone - boom-bust dynamics - Each staple has own rhythm, timing - Forest industry -> takes a long time to grow a tree - Resource industry tend to be concentrated in towns - Each town takes on characteristic of that industry □ Prone to seasonal patterns, timing affect local labor market - Local staples region locked into set of global relations producingdependency - Power and decision-making vested in metropole □ Growth tends to concentrate in a certain place □ Role of periphery (marginal places), are to provide resources for the more powerful places - Instead of global integration - Innis saw avortex □ Kind of spiral - where marginal places continue to get poorer and rich places get richer and more powerful Mel Watkins: - Staples trap = once a region specializes in producing staples, it finds it very difficult to reconfigure production around other sectors - You can make a lot of money selling raw materials - Economy can be trapped in this resource mentality - Marginal / Local Theory ○ Innis' marginal theory is embedded in institutional economics and its critique of orthodox / neoclassical economics ○ Critical of neoclassical economics - Such as Model of supply and demand - Laws and theories that emphasize max profiting ○ Orthodox economics grounded in modelling ○ There are general economic logics - General laws and rules that underlie ○ Paul Krugman: "To be taken seriously an idea has to be something you can model" 1995 - To truly understand something you have to be able to model it - By modelling, he means the mathematical kind (the Greek letter writing kind) - Best way of understanding economy = through mathematical models ○ Such theories draw upon universal concepts, such as rationality, inherent laws of markets, equilibrium ○ They have a formal vocabulary, precise definitions and rules, assumptions that are universal and invariant, and idas of rigorous correspondence model and reality - Innis argues ○ Formal universal models can be useful, but there are other styles of theorizing ○ Innis is skeptical of definitions and procedures that claim to go beyond the local ○ He recognizes models always constructed and deployed in particular settings ○ Influenced by institutional economics of: - Thorstein Veblen: ○ Concern was not to construct a model to explain everything, but to understand the strange customs of his own time and place ○ Institutions matter, they shape markets and shape the economic life ○ Critique notion of 'rational economic man' - The idea that people behave rationally - 19thc, wealthy men smoked cigar wrapped in 100$ -> this is irrational to be smoking your money away - Context is important - Institutions that regulate and govern are important ○ Stressed role of institutions: - Role of state - Systems of rules, norms, procedures, conventions and organizations - Innis ○ Orthodox theories justify staples production in terms oflaw of comparative advantage ○ Law of Comparative Advantage = idea that countries prosper when they specialize, countries should specialize in the thing they have an advantage in (e.g. if you have bananas, specialize in bananas, if you have cheap labor - ex. China - then specialize in cheap labor) (Ricardo) - Ricardo was from England, during that time, Britain was a manufacturing town - Specialization theories - Innis points out that the theories - who are they by? Is there something in it for them? Reconsider the ideas ○ Conceit of orthodox theory is its assertion that markets would autonomously produce the best possible outcomes ○ For Innis (like Veblen and Karl Polanyi), markets have to be organized ○ A pure self-regulating economy is impossible ○ All markets reflect social customs, culture, historical practices ○ State regulation is needed to match supply and demand for land, labor and money ○ Supply and demand is not sufficient to match; always mismatches ○ Land, labor, and money commodities - state / gov need to be heavily involved to match supply and demand ○ All markets economies are embedded in non-market institutions, but more visible in marginal or staples economies such as Canada - Economy that is governed more by land Lectures Page 2 - Economy that is governed more by land - Staples economy - oriented on land and resources and primary economies - Which requires even MORE state and gov involvement (non-market institutions) - Initial costs, firms are unlikely to have this sum of money - State is needed to support this sum of investment - Theory reflects its place ○ Staples theory uniquely suited to Canadian context ○ Dangers of intellectual dependency - Dangerous to get all theories and ideas from another country - Theories are shaped by the country's thoughts and standards ○ "Colonial powers seek to create not only economic and .." ○ Inside Job (film) - Innis argues: ○ We need a theory for the 'margins' ○ These countries should advance their own understandings ○ Theory from the margins = developed in a Third World Country ○ Theory developed in a marginalized place ○ All repressed people, should develop their own theories - "A Theory from the margin makes thinkable a dedogmatizing rearrangement of the local intellectual field" - Richard Rorty - Innis brings togetherthree concerns ignored in neoclassical / orthodox economics - Production of Territory: 1.Geography 2.Institutions 3.Technology - (Innis triad) 1. Geography a) Natural resources and physical geography - Geography is important to economics - Landscape, physical geography to economic development - Geography provides the groove / track for which the economy develops - Geography does not determine economy b) Spatial relationships - Must understand power relations that influence that place - Economic relationships the place is in - Trace the power between places in order to understand the prospect of the place - e.g. Canada - to understand, must understand relationship with USA - Conceptualization = uneven process - Concentrate in particular spaces - Boundaries, relations, positions, landscapes of power 2. Institutions a) Role of government: i.e. infrastructure provision b) Institutional structure of firm: - ownership, control, competition c) Institution of market: - market less importance in setting price 3. Technology - Role in defining staples available in hinterland - We must look at the intersection of all three concerns - How can these theories help us understand the Canadian resource? - Canada heavily dependent on: forestry, oil and gas reserves Summary: - Law of comparative advantage = a theory developed in terms of the interests of metropole - Need for a local/marginal theory sensitive to context British Columbia as a Staples Economy: The Forest Sector - Canada, 1996 resource industries only 4.6 % of employment - But half of all merchandise exports - Many communities dependent on resources Lectures Page 3 - - B.C. 43 million hectares of forest - Under British North American Act of 1867, forests are provincial jurisdiction - Over 90% of BC forest land is owned by the Crown - This land is leased to forest companies, who pay a royalty payment - the stumpage fee - BC = a staples economy, dominated by fur trade, gold, copper, coal, forestry - - - Geography ○ Resources: abundance untapped timber ○ Spatial relations: reliance on export markets - Institutions ○ Role provincial government, low stumpage rates ○ Long term leases, open-door policy ○ Reliance on R&D in donor country - Technology ○ Conservative approach Cyclone / Crisis in the sector from 1970s - Since 1997: 27 mills closed, 13,000 jobs lost - Government revenues have declined by $600M since 1997 Lectures Page 4 - Government revenues have declined by $600M since 1997 - Current Challenges: - Foreign Direct Investment - Help or hindrance? ○ Question of who gets to cut the harvest? ○ Rights are auctioned by the province through a Tree Farm License (TFL) scheme ○ A license is usually for about 25 years, some conditions apply ○ TFLs generally go to large corporations, generally foreign - Foreign firm as catalyst ○ Financial and mangerial inputs ○ Access to international markets ○ Leading technological know-how - Limitations to the catalytic effect ○ Emphasis on existing facilities ○ Access to domestic markets ○ Little innovation or higher value added production ○ Preempts indigenous development - Problems of scheduling the harvest ○ Sustained yield - where annual cut is less than or equal to annual increment of growth over 5 yr avg ○ However, problems of estimating annual growth ○ Until 1970s, either private / public sector responsible stewards according to Barnes and Hayter, 1997 ○ Recognition now that past estimates were not accurate ○ Fall down - decline in timber harvests resulting from overharvesting, and to lower volumes available through second growth stands - Clapp: ○ All resources (renewable and non-renewable) pass through resource cycle - 3 phases • Exploration and boom • Large-scale sxploitation • Collapse - Renewal of resource - 2 ways ○ Natural - Until 1980s, 2/3 of forests renewed naturally ○ Silviculture - Involves soil prepartion, planting, nurturing - Problems compounded by pine beetle devastation - US Trade dispute
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