Structural change and regional convergence: the case of declining transport costs

Regional income inequality within countries is an important contributor to global income inequality. I investigate its relationship with structural change and growth using the historical experience of the United States since 1880. Specifically, I modify an existing multi-sector general equilibrium growth model and highlight two important forces: (1) structural change, which disproportionately benefit poor agricultural regions; and (2) transport cost reductions, which shrinks regional price and wage differences. Consistent with existing research, structural change accounts for the Southern states’ convergence to the Northeast. In contrast, I find reductions in transport costs offset the nominal income gains from structural change for the Midwestern states. The Midwest case is of greater relevance for developing countries, given their high internal transportation costs. These results suggest growth in developing countries may not significantly reduce global income inequality.Structural change; income convergence; dual-economy

Regions, frictions, and migrations in a model of structural transformation

Why do some regions grow faster than others? More precisely, why do rates of convergence differ? Recent research points to labour market frictions as a possible answer. This paper expands along this line by investigating how these labour market frictions interact with regional migration. Motivating this are two important observations: (1) farm-to-nonfarm labour reallocation costs have fallen, disproportionately benefiting poorer agricultural regions; and (2) migration flows vary dramatically by region, lowering (raising) marginal productivities in destination (source) regions. Using a general equilibrium model of structural transformation calibrated with US regional data over time, I find regional migration barriers magnify the income convergence effect of labour market improvements. For instance, recent research points to improved nonagricultural skills acquisition as a driver of Southern US convergence with the North. I find the strong link between labour markets and Southern convergence follows from the South’s historically extensive migration restrictions. Finally, the model captures the low convergence rates experienced by other regions, such as the US Midwest.structural change; regional migration; transportation costs; labour market frictions; regional convergence

Management Matters

New indications of managerial innovations are created and then used to show that changes in organizational technologies are an important source of economic growth. Specifically, the analysis demonstrates that, first, in response to a positive managerial technology shock, output, productivity and hours significantly increase in the short run, second, these types of innovations are as important as non-managerial ones in explaining movements in these variables at business cycle frequencies, and, third, product and process innovations promote the development of new managerial techniques.Business Cycles; Productivity; Management techniques; Technical Change

Better off Dead: “Value Added” in Economic Policy Debates

Politicians across Canada have come to understand that our economy improves when we develop so-called “value added” industries and jobs. They suppose that turning raw materials into finished goods creates more value added than simply extracting and exporting raw materials directly. That understanding is entirely and often dangerously wrong. Indeed, the meaning of the phrase “value added” has been so widely misunderstood and distorted that we would all be better off if it were struck from the political rhetoric and public debate entirely. The reality is that almost everything Canadians are being told about which activities add value, and which ones do not, is utterly backwards. Manufacturing has come to be seen as the ultimate source of value added, as though the physical manipulation of matter was somehow responsible. For example, the leader of the federal Opposition, the NDP’s Thomas Mulcair, has insisted that “exporting unrefined heavy oil creates no valueadded jobs” and likens exporting raw logs to “a practice typical of undeveloped nations.” It is not just the NDP, similar statements are made across the political spectrum. Fortunately for us, such views can be put to the test. We will see that they are not just inaccurate, they are the very opposite of the reality: Canada’s raw resource extraction industries actually provide the highest valueadded, often by a significant margin. Oil and gas extraction, for example, creates $1.36 million in value per job per year, 15 times higher than the national average for all sectors and more than triple the value added per job per year in the petroleum products refining sector.  Absent such data, is there a better way to think about value added that would provide a clear and intuitive defense to misleading statements? Thankfully, there is: industries that generate the most income are industries with high value added. To say a sector like oil and gas extraction creates no value-added jobs is to say it creates no income, which is plainly false. If replacing “income” for “value added” leads a claim to not make sense, then it is likely false and the politician or commentator should be dismissed. Disturbingly, this mixed-up thinking matters a lot for the health of Canada’s economy. Public policy often favours supposedly high value-added industries at the expense of others through subsidies or other supports. Instead of creating value, when governments favour one sector over another they invariably hurt the economy by distorting the allocation of labour and capital, which lowers Canada’s overall GDP. This is true for any subsidy made on the basis of “value added” – subsidizing resource extraction would also be economically damaging. There may be other reasons to provide industry supports – but value added is never one of them. Canada’s economy, and everyone in it, would be better off if politicians and public commentators put the phrase “value added” to rest

Alberta's Long-Term Fiscal Future

Alberta’s short-term fiscal challenges are well known, but its long-term ones are more significant. An aging population, a high reliance on non-renewable resource revenue, and rising debt levels will increasingly widen the current gap between spending and revenue. This paper estimates how large this gap is and where it is headed in the coming decades. Combining detailed data and projections for macroeconomic and demographic variables with a rich model of Alberta’s budget, this report quantifies the scale of the province’s fiscal challenge and explores potential ways to address it. Overall, I find the present value of the difference between spending and non-resource revenues is 4.2 per cent of GDP between 2018 and 2100. By 2040, the fiscal gap that year will be roughly 44 per cent of controllable government revenue, 29 per cent of program spending, and the equivalent of over 4 per cent of GDP. In present value terms, the fiscal gap between now and 2040 is equivalent to over $250 billion today. I further find that debt levels are not on a sustainable path, as the long-run debt obligations exceed the government’s future ability to service that debt without significant policy changes. Meaningful action on both spending and revenue can address the province’s financial challenges. I explore various potential options. Without sustained, disciplined, and transparent action today, Alberta faces a precarious fiscal future

Fiscal Policy Trends: Balancing Alberta’s Budget by 2022 is Only Part of Alberta’s Long-Run Fiscal Challenge

Since oil prices fell in 2014, Alberta’s provincial government has wrestled with large and persistent deficits. The new government elected in April 2019 is committed to balancing the books by 2022. But a longer-run challenge remains

The Taming of the Skew: Facts On Canada’s Energy Trade

Public perception of Canada’s energy trade is skewed towards Alberta’s oilsands and pipeline projects; a look at the facts reveals a more complex picture. Over the last decade, growth in Canada’s energy trade has been nothing short of historic. Energy exports have become so significant that the revenue is now equivalent to nearly $9,000 for every Canadian household. And it is only projected to grow much, much larger. While Western Canada leads the industry, every region — including Ontario, Quebec and Atlantic Canada — plays a key role. Today, nearly every province is a net energy exporter. The energy sector also adds much to Canada’s economy, with valueadded and productivity higher than nearly every other sector. When it comes to labour compensation, oil and gas extraction is the highest-paying sector in the country, at more than three times the average hourly earnings in the Canadian economy generally, and nearly 50 per cent higher than manufacturing. It is vital that policy debates rely on accurate information; unfortunately, this is not always the case. The often heated rhetoric neglects important aspects of Canada’s energy trade. For example, the type of energy that Canada trades has undergone a dramatic transformation. Ten years ago, natural gas was the largest energy export but today accounts for less than one-tenth of the total. Meanwhile, crude oil exports have more than quadrupled. Even more surprising to many Canadians, and perhaps even policy-makers, is how much energy Canada imports. Even Alberta, with its vast energy reserves, imports a considerable amount of energy. Alberta’s energy imports have grown faster than any other province and will soon exceed Ontario’s, a province more than three times larger with very little of its own oil production. Trade in energy is also intimately tied with Canada’s foreign investment policies. The majority of Canada’s energy trade is in the form of related-party transactions. For example, Suncor exports oil from its Canadian operations to its American refineries to supply its American gas stations. This fact has important implications for Canadian policy: foreign multinational firms are an important and growing part of the country’s rapidly expanding energy trade. Promoting Canada’s energy trade requires lowering investment barriers and creating a predictable and stable investment climate for foreign direct investment. Yet, in practice, Canada has recently shown a tendency for the opposite, with governments blocking the takeover of Potash Corporation by Australia’s BHP Billiton, and announcing, after the takeover of Nexen Inc. by a Chinese firm, that future takeovers would face even greater scrutiny. Foreign investment in Canada’s energy has already begun to fall, feasibly as a result of these increasingly hostile signals. Canada has a great deal riding on the future of its energy industry — an industry that is as economically beneficial as any other, if not more so. It is absolutely crucial that we ensure our energy-trade policies are based on high-quality and objective information; politicized and emotional rhetoric does not help

The Impact of Sub-Metering on Condominium Electricity Demand

Growing concern about the environmental effects of electricity generation is renewing demands for electricity conservation and efficient usage. With a substantial fraction of the population insulated from energy price signals in bulk-metered apartment and condominium buildings, some jurisdictions are considering mandatory metering of individual suites. This study analyses data from a Toronto condominium building to assess the impacts of suite (or sub-) metering. We estimate the aggregate reduction in electricity usage arising from sub-metering to be about 20%. Financial savings to residents are much smaller. We analyze large variations across units in electricity consumption after sub-metering finding that unit characteristics explain much but not all of this variation. We perform both private and public cost-benefit analyses of sub-metering and find that the social net benefits depend strongly on the value assigned to externalities from generation and that net social benefits may often be positive when private benefits to the residents are negative.electricity demand, electricity sub-metering, energy conservation

The Missing Food Problem: How Low Agricultural Imports Contribute to International Income and Productivity Differences

This paper finds an important relationship between the international food trade and cross-country income and productivity differences. Poor countries have low labour productivity in agriculture relative to other sectors, yet predominantly consume domestically-produced food. To understand these observations, I describe and exploit a general equilibrium model of international trade to: (1) measure sectoral productivity and trade costs across countries; and (2) quantify the impact of low poor-country food imports on international income and productivity gaps. Specifically, I expand on Yi and Zhang [2010] and modify an Eaton-Kortum trade model to incorporate multiple sectors, non-homothetic preferences, and labour mobility costs. With this model, I estimate PPP-adjusted productivity from observed bilateral trade data, avoiding problematic price and employment data in poor countries that direct output-per-worker estimates require. I find reasonable trade barriers and labour mobility costs account for the low poor-country imports despite their low productivity. Through various counterfactual experiments, I quantify how easing import barriers and labour mobility costs increases imports and within-agriculture specialization, shuts down low productivity domestic food producers, and lowers the gap between rich and poor countries. I also find an interaction between domestic labour-market distortions and trade barriers not found in the existing dual-economy literature, which largely abstracts from open-economy considerations. Overall, I account for one-third of the aggregate labour productivity gap between rich and poor countries and for nearly half the gap in agriculture.Food Problem, Dual Economy Model, Trade, Agriculture, Productivity

Power Play: The Termination of Alberta’s PPAs

By now, any Albertans who follow the news are probably aware of something called a Power Purchase Arrangement (PPA). Up until a few months ago, the PPA holders — which included TransCanada, ENMAX, and Capital Power — were responsible for buying electricity from legacy power plants at pre-determined rates and selling it into the grid. But with power prices falling and costs rising, the PPAs are no longer profitable. So, early in 2016, they backed away from these arrangements and handed the money losing PPAs over to an entity known as the Balancing Pool. With the electricity bills of Alberta households and business in the balance, it’s been a high-stakes dispute between the companies and the government ever since. The government estimates losses to Alberta ratepayers may be up to $2 billion and alleges the regulations under which the companies terminated their PPAs are invalid. They’re going to court to try and prove it. The companies counter with substantially lower cost estimates and point to changes in government policy as a permissible reason for termination. How did we end up here? How costly will the PPA terminations really be? Given the importance of this issue, we cut through the politics and see what data has to say. There are three key pieces to the puzzle. First, in June 2015 the province strengthened rules around emissions from large industrial facilities. The new rules gave more ambitious targets to facilities and increased the charge on greenhouse gas emissions above their targets from$15 per tonne to $30. Second, in November 2015, the Climate Leadership Panel recommended leaving the price on emissions at$30 per tonne but changing the targets to treat all power producers equally regardless of their emissions intensity. For coal, this was a big hit, and the industry was recommending — and hoping for — a better deal that they didn’t get. Finally, and perhaps most importantly, electricity prices collapsed. Despite the fears of many, the new climate policies are unlikely to increase electricity prices. This makes it difficult for coal power to cover its now higher costs. Overall, we find policy changes account for roughly half the drop in PPA values, while falling prices account for the other half. The good news for Albertans is the drop in value appears to amount only to $900 million, and since one of the PPAs is already owned by Alberta’s Balancing Pool the real cost of these changes is closer to$600 million. All in, that amounts to about $2.25 a month for a typical household, but it will only show up if power prices remain very low. So, while there is a chance consumers will pay it, they will only end up doing so if they are saving far more on power