Moving up — way up — the value chain

VancouverSun.com – business
September 7, 2010.   By Robert Roach And Todd Hirsch, Vancouver Sun

In the bad old days when people were sent to poorhouses for falling on hard times, there was a job called “picking oakum.” Prisoners were forced to untwist old bits of hemp rope by hand until their fingers bled. The resulting product was then used for other purposes such as stuffing mattresses. As such, picking oakum was a value-added industry: A raw material was processed and, in turn, value was added and “jobs” were created.

It is easy to imagine a local oakum producer stressing how much better it is to untwist the hemp locally as opposed to exporting it in its raw form.

Picking oakum is an extreme example, but it highlights the need for economic strategies that go beyond simply promoting more value-added activity. A new meat-packing plant, bitumen upgrader or auto-parts factory is not going to maintain Canada’s economic prosperity in the global economy of 2010, let alone 2025 or 2050. We have to aim higher than the modern equivalents of picking oakum.

This does not mean that we should not make more pasta, furniture and/or other value-added manufactured products here in Canada when and where it makes economic sense to do so. What it means is that we need to fully understand that “making things” will not keep Canada prosperous.

For example, we have lots of oil and natural gas that we could turn into plastic patio chairs. But the reality is that, even after shipping the chairs across the sea to North America, the Chinese can still make plastic patio chairs cheaper than we can. As a result, when some guy in Florida needs a patio chair, he buys the one made in China. And at $10 each, you have to sell a lot of patio chairs to fuel your economy.

So where does this leave us? Believe it or not, it leaves us in a very enviable spot. The Chinese officials who know that their country’s long-term economic future will be bleak if it involves making stuff that ends up in dollar stores would love to have the advantages that we have in Canada right now: a modern service-based economy with a high level of education, a relatively low level of poverty and infrastructure galore. We have everything we need to aim for the top of the global value chain.

The good jobs of tomorrow and the industries where we have a chance to develop a comparative advantage are largely at the upper end of the value chain. You don’t want an army of workers assembling iPads. What you want is workers who design iPads and other marketable innovations. You want businesses that not only figure out how to extract oil and gas here in Canada, but that sell their expertise to drilling companies around the world.

We have the ingredients — wealth, education, previous successes, entrepreneurs, great cities — to play at the upper end of the value chain. We need to make this our focus. Exporting natural resources and “making stuff” will remain key components of our economy, but if we don’t aggressively go after the profits and jobs to be found in medical research, education services, financial services, biotech, IT, entertainment and so on, we will find our standard of living falling as our competitors get better and better at the bottom and top ends of the value chain.

The Canadian economy needs to be driven by ideas, innovation and the practical knowledge that takes ideas and innovation and turns it into good jobs and economic growth.

One caution: the bursting of the dotcom bubble showed us that economic activity at the top of the value chain still has to have real substance.

If it is just a bunch of young people playing pool in the lunch room and getting paid in soon-to-be-worthless stock options, it won’t work. We need good ideas that are turned into real innovation and real value. We have the ingredients to do this.

Now is the time to stir the pot and make it happen.

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Robert Roach is senior researcher and director of The West In Canada Project, Canada West Foundation. Todd Hirsch is senior economist, ATB Financial. This post is based on a forthcoming book titled Rewriting the Code: Changing Canada’s Economic DNA by Todd Hirsch and Robert Roach

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