A HEWER OF WOOD'S MIDLIFE CRISIS

BC's Resource Wealth is Drying up in a Hurry

Monday, May 17, 1999
Paul Sullivan
The Globe and Mail

If you talk to Alissa Antle, the hip, young product-development director for a Vancouver software company, you get the feeling British Columbia's economic slump is a mere bump on the road to unprecedented prosperity. But talk to Al Todd, BC's Forester of the Year in 1994, and you start wondering where your next meal is going to come from. Ms. Antle and Mr. Todd are the two faces of an economic duality that is part of a global shift from wealth that comes from the earth to wealth generated in cities. The shift is particularly dramatic in British Columbia, which has gone from having one of Canada's stronger economies, thanks to its wealth of resources, to being the nation's basket case -- because of those same resources. It has run 10th in growth among the provinces in 1998 and 1999 and is forecast to grow only slightly in 2000. And the clock is ticking -- there are clear signs that BC must nurture its promising new economy because the old one can't sustain the prosperity British Columbians have come to expect.

Just last week, a leaked plea to the federal government from the Forest Ministry revealed that BC expects to lose 18,000 forestry jobs in the next two years. That's in addition to the thousands already cut, which still provides the bulk of the province's export revenue. Not so long ago, BC's wealth was sweated out in hard-hat towns such as Prince George, where smokestacks thrust skyward and the air is redolent with the scent and sound of big money -- sulphur and cedar and saws, trains and logging trucks.

Prince George lost a big mill last year (one of 12 that closed across the province), but it still boasts 13, a concentration of lumber and pulp-and-paper production perhaps unmatched in the world. This is the centre of BC's old economy. But behind the brawny industrial facade, that economy is in big trouble. Just ask Al Todd. In 1993, Mr. Todd's Integrated Silviculture Services Ltd. invested a million dollars in a new office and warehouse by the CN rail yard. Bad timing: In the next five years, lumber-shipment levels in BC's northern forest industry alone dropped 7.1 per cent, and net earnings in the North declined from more than $300-million annually to a breathtaking loss of $250-million.

Mr. Todd clung to optimism. The government of Glen Clark devised a plan to revitalize the industry, and Integrated Silviculture, which provides an array of forestry services from tree planting to cleaning up logging sites, was well positioned to take part in it. Forestry needed fresh thinking. It was reeling from a series of blows: new low-cost competition from the forests of Siberia and South America, restricted exports to the United States, environmental boycotts and the uncertainty of supply as Crown land was being turned into parkland or became subject to aboriginal land claims.

The government came up with Forest Renewal BC, which was supposed to take $400-million a year from stumpage fees (a tax on cutting trees) and invest it to help the industry diversify. It also brought in the Forest Practices Code, a set of regulations designed to satisfy environmentalists. Integrated Silviculture anticipated all kinds of new work making sure loggers adhered to the code. But plans went awry. Last year was a really bad one: BC's second-best resource customer, Japan, collapsed, costing the industry $2-billion in sales and erasing new money for renewal. Then, to help out the forest companies, Mr. Clark promised to cut production costs by streamlining the Forest Practices Code.

Mr. Todd's business, like many, got caught. His blue eyes blazed when he pulled out a letter he sent to the Premier last September: "As each day passes, the bright economic picture for small business in this province gets dimmer. . . . With 16 years in the forestry-consulting business, I have not seen such a disaster. What am I supposed to tell these people?" He received no reply. So he wrote again. "On Nov. 24, the bright light of economic prosperity for our small forestry-consulting firm has been extinguished. Today, we have commenced the indefinite layoff of our staff."

Last year, Mr. Todd was nominated as Business Person of the Year by the Prince George Chamber of Commerce. By January, he had let go all 30 of his employees, adding to a regional unemployment rate that is the province's highest, at 15.6 per cent. "I'm 51 years old; I've been working forestry since I was 17," he said. "I came here 22 year ago, put my roots down. I sure get disenchanted." So he is pulling back, keeping the company but moving to Penticton in the trendy Okanagan, where, in a small way, he will become part of the new economy, along with his wife, as the proprietors of a bed and breakfast.

The forest industry's "worst year ever" dragged the whole BC economy into a recession in 1998. But there is no obvious evidence of it in Vancouver. The skyline is dotted with cranes erecting condos, office buildings and hotels, including what promises to be the tallest hotel in the West. The resource sector has lost more than 25,000 jobs in two years, but the city's unemployment rate in April was 8.2 per cent -- just below the national average. Victoria's rate is even better -- 6.3 per cent, the lowest in a decade. Despite the forestry slump, the BC economy has created 80,000 jobs since last July, most of them around Vancouver. At this pace, it will set a record. How can this be?

Consider this: In 1997, the profits of BC's top 40 companies plummeted 90 per cent from the previous year. However, exclude those in the resource sector, and corporate profits for the rest increased by 40 per cent. Twenty years ago, resources made up 21 per cent of the BC's gross domestic product. Last year, the digits were reversed: 12 per cent. Economist John DeWolf figures it has been 10 years since resources really shouldered the load in BC

Now consider Alissa Antle. People like her have created a lot of the new jobs -- high tech has grown 55 per cent in five years, four times the provincial average. She is about 20 years younger than Al Todd, wears a jewel in her nose and takes her dog to work. She also heads a young team at Multiactive Education Inc., whose big product, Brainium, is mined from their minds. Delivering science to Grades 4 to 8 over the Web, Brainium uses colourful characters and interactive stories to stoke the curiosity of children around the world. Last year's sales were about $2-million.

The media and government obsession with resources has obscured how much the economy has shifted in other directions. The vast majority of British Columbians -- 74 per cent of the work force of 1.9 million -- now work in service industries. Mr. DeWolf measured growth rates and financial performance, and identified the province's 10 economic stars. They are, in order: business services (including companies like Multiactive); other technology-based industries; industrial-products manufacturing; the movie business; higher-value-added agriculture, food and beverages; value-added wood products; consumer goods manufacturing; air and marine transportation; tourism; and specialized financial services.

They show how much BC has come to depend on making movies and transporting conventioneers to the Grouse Mountain Skyride. They now account for more than 8 per cent of GDP, not far behind the resource sector. Of course, it would be a mistake to underestimate the contribution the resource industries continue to make. They still generate half of all exports.

"Despite the emergence of a vibrant high-tech sector and the growth of other non-resource industries," said Jock Finlayson of the BC Business Council, "there has actually been relatively little diversification of BC's export trade over the past decade." Also, the new economy is almost entirely urban. Rural BC remains mired in the old economy -- and double-digit unemployment.

Even the rare bit of good news comes with a nasty twist. In recent weeks, MacMillan Bloedel Ltd., which is BC's largest forest company and second- largest company over all, has led an apparent turnaround, posting a $30- million profit in the first quarter of 1999, a period in which it lost $16- million last year. However, company CEO Tom Stephens has said MacBlo has no plans to invest more money in BC until the economic climate improves and uncertainty over land claims is cleared up.

So the suspense for the people of BC is nerve-racking. Can the resource companies return to prosperity? If not, will the new economy deliver on its promise? University of British Columbia professor Michael Goldberg, guru of the new economy, thinks that the way out of the woods is clear: The province must change its attitude and its economic strategy. "It's as if government and capital and labour agree we're still in a resource economy," he said. Prof. Goldberg has challenged British Columbians to "reinvent" the province by identifying products for which higher prices can be charged, reducing the terrible cost squeeze now roasting resource industries and allowing capital to move into new and profitable markets and niches.

The first step is to acknowledge that they already have those products. "Tourism has become an $8.5-billion industry by selling products such as 'Vancouver' and 'Victoria,' " he said. What's more, instead of sinking $300-million into shoring up the past by bailing out an inefficient pulp mill in Skeena, he argued, the government should put its money into something like the vaunted Ballard fuel cell. "Ballard," he enthused, "looks like the Microsoft of Canada." But is government action really necessary? After all, the new economy has got this far largely without it.

The problem is that, unlike industries that rely on the earth, high tech doesn't have to stay put. There have been rumblings recently that innovative local companies such as Electronic Arts, a world leader in electronic games, will look elsewhere to invest until the tax and regulatory climate is more competitive.

Smart, well-educated knowledge workers are in great demand -- and fed up with one of the continent's higher personal-income-tax rates. They are highly mobile, and are migrating to where taxes are lower -- Boston or Seattle or Silicon Valley, even Alberta and Ontario. Compare the 48.1-per-cent marginal tax rate on income over $60,000 in Vancouver to that in Seattle, home of Microsoft: 28 per cent. Still, said Alissa Antle, Vancouver retains a major advantage: "It's waking up in the morning, looking at the mountains, driving my jeep down Venables, past the funky cafe, you know, going for a walk on the beach with my dog after work. On a personal level, I wouldn't get that in Silicon Valley.

"As long as quality of life is a big issue for people, and quality of life is deteriorating in other places, that's always going to be a selling feature." Like so many people in her business, she has been approached by U.S. and Eastern Canadian firms -- about a dozen times in the two years she has been at Multiactive. So far, she has resisted the siren song, thanks to the lifestyle and the promise of what lies ahead for BC's high tech. "I don't get the feeling that my work's done here," she said. "There's more companies to grow, companies to get bigger, so why would I go?"