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The Staple Theory at 50: The staple theory and the carbon trap

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Photo: Mel Watkins

As part of our continuing special series celebrating the 50th anniversary of the publication of Mel Watkins' classic article, "A Staple Theory of Economic Development," we present here an innovative and provocative commentary by Brendan Haley, Ph.D. candidate at Carleton University and author of several recent works on green industrial policy. Haley argues there is an intersection between the "staples trap" and a new, more ominous "carbon trap," that must be addressed centrally in modern policy responses to the challenge of staples dependence.

In my search for insights into the opportunities and barriers to transitioning Canada towards a low-carbon economy, Watkins' (1963) article, "A Staple Theory of Economic Growth," was one of the first places I looked.

The article is indispensable because Watkins undertook the ambitious endeavour of translating the wide-ranging and multi-disciplinary, but largely descriptive, work of Harold Innis and other Canadian and non-Canadian economic historians into a theoretical synthesis. The article contains the first written use of the term "staples trap" to describe the pitfall that resource-based economies can encounter.

Below, I intend to highlight the richness of Watkins' theory and the multiple factors that can produce the staples trap. I will then outline how I have applied this pattern in Canadian economic history to discuss Canada's current climate change problem as a "carbon trap." Finally, I will discuss if the policy agenda required to escape from the staples trap, as defined 50 years go by Watkins, conflicts with what is needed to escape the carbon trap.

Watkins' rich synthesis

"A Staple Theory of Economic Growth" was first introduced to me in an undergraduate economic history class. It was presented primarily as a theory based on linkages (forward, backward, final demand) from the base staple to other sectors of the economy. This formulation invited the use of input-output models; weak linkages are indicative of the staples trap of over-dependence on resource exports.

However, Watkins' consideration of "spread effects" from a resource staple base also included supply-side factors, highlighting the influence of the staple on the nature of entrepreneurship (both private and governmental) and technological absorption and innovation. The consideration of these factors is true to the Innisian tradition, moving beyond physical and financial linkages, towards the influence of staples on institutions, values, and politics. I don't remember talking about this in my undergraduate class.

Watkins further opens up his analysis to consider shifts in the international environment, to which staple-based economies are particularly vulnerable. He notes that sustained development requires economic institutions that support the ability to shift production in the face of economic change. This introduces the value of resilience and adaptability and the need to consider factors such as knowledge assets and access to education, the nature of political power, and the ability to use and produce new technologies.

Throughout much of the article, Watkins is answering to the same criticism that is heard today: that the approach is an historic description and no longer relevant to the modern Canadian economy. Yet, to an economic historian, history matters. While the structure of the economy changes and evolves, it does so along a particular trajectory, which has a historic starting point. Even if the staple is long gone, it can still leave its "stamp" that influences subsequent developments.

Watkins is very careful not to claim that staples are the unifying theme in explaining the growth of the Canadian economy at all times, but he also makes the salient point that the most persistent staple biases relate to economic institutions and political values. Furthermore, an "inhibiting export mentality" and the undue political influence of staple exporters are key determinants of the staples trap.

This insight echoes throughout Canadian economic policy debates. Following the article, Watkins himself (1977), Kari Levitt (1970), the New Canadian Political Economy School (Drache and Clement 1985), and industrial policy advocates (Britton and Gilmour 1978) all discussed how Canada's lack of innovation, its "truncated" form of industrialization, and its dependence on foreign technology, could be traced back to its staple history. A country weak in innovation capabilities might easily rebound back towards resources as the safe space, as discussed by Stanford (2008).

All of this is to warn that in the Canadian context, leaving the free market to its own devices can easily recreate the staples trap of resource and technological dependence. Correspondingly, if we wish to enhance the transformative power of the Canadian economy and reduce its vulnerability to international shocks, Canadian policy makers need to develop political programs and economic institutions capable of opening up different trajectories.

Changing the trajectory would require interventions across the series of factors that influence the structural evolution of the economy. Since this is a problem that involves economic and political structures, interventions cannot be limited to "getting the prices right," but must also include policies to promote factors such as entrepreneurial activities, knowledge production and exchange, and the coordination of national and regional efforts.

A fundamental conundrum since Watkins wrote his article has been the challenge of developing an industrial or innovation policy aimed at increasing Canada's capacity for transformation, in the context of historically bestowed economic institutions and political interests promoting an "inhibiting export mentality."

The carbon trap

I have sought to gather some insights from Watkins' article and the rich history of Canadian political economy to explain Canada's particular climate policy problem (Haley 2011). I have argued that the staples trap peculiar to the 21st century is also a carbon trap, which prevents Canada from transforming towards a low-carbon economy. The carbon trap presents an ecological problem as well as an economic one, since it would be wise to plan for futures where the world might take action on climate change.

The pattern I gleaned from the works of Innis, Watkins, and others, was one of export-led development installing a series of structural rigidities. When faced with crisis and economic change, the strength of these rigidities led the economy back towards staple export dependence -- instead of transformations towards new technological, economic, and ecological pathways.

The rigidities in the context of the carbon trap include the high fixed capital costs of bitumen sands development; the staples export mentality of the Conservative government and other political and business leaders; regional political challenges; and the political interest of the bitumen industry. The vulnerability of bitumen as a staple product to international market shifts includes its exposure to changes in international climate policy. True to the staple trap pattern, instead of reacting to international uncertainty and vulnerability by diversifying towards low-carbon technologies, political and industrial leaders react by exacerbating the rigidities even further by calling for the build-out of new infrastructure (such as pipelines) and weakening environmental regulation and initiatives.

The carbon trap certainly relates to the chance geographic circumstance of Canada sitting on top of a highly carbon-intensive resource -- at the very time when the world needs to reduce carbon emissions. Pulling from Watkins' insights, we can also add that the institutional and political stamps left by previous staple periods contribute to the durability of the trap.

Approaches to escape from the traps

Of course the staples trap is not inevitable, and neither is the carbon trap. Both identify a policy problem and provide a warning. Watkins' article inspired many policy initiatives to reduce Canada's vulnerability to the trap and build a more balanced economic structure. Today we can ask if the policy agenda to escape from the staple trap, as defined 50 years ago by Watkins, conflicts with what is needed to escape from the carbon trap. I contend that the answer depends on what you decide to pull out of Watkins' original article.

If the staple trap is viewed primarily as a problem of weak industrial linkages, you can escape from it by strengthening these linkages. In the case of the bitumen sands you can strengthen backward linkages by building transport systems (e.g. pipelines) and through the use of domestic machinery and equipment. Forward linkages can be enhanced through initiatives to "add value," such as expanded upgrading and refining.

The problem is that "strengthening" these linkages could exacerbate the rigidities that lead to the carbon trap and sink Canada even further into a fossil fuel pathway and away from a green innovation trajectory. Also, a narrow focus on these linkages only makes sense if we assume that nothing changes in the international economy: a simplifying assumption that Watkins made to discuss the demand-side linkages, but subsequently relaxed to create a "historically relevant" theory.

The interpretation of the staples trap which I believe is truer to the article, and to Watkins' later work, is that the problem fundamentally concerns the capacity of the national economy to transform towards new economic structures or paradigms. This reading highlights the historical-evolutionary and political economy aspects of the article. This interpretation of the staples trap directs a policy agenda towards the encouragement of alternative entrepreneurial activities, the creation of new economic institutions, and political values aimed at building economic diversity in order to open up new pathways towards desirable futures. In the context of the climate problem, these pathways must be based on deep greenhouse gas emission reductions.

Of course the latter policy agenda does not necessarily preclude activities such as upgrading and use of domestic machinery along the way towards a low-carbon economy. But a change in political understandings, economic institutions, and an economic strategy would have to be first and foremost. Then a sectoral strategy could be developed within the bitumen sands that would encourage linkages if they could help mould Canada's economic structure towards low-carbon pathways. The fundamental policy problem is again the need for a Canadian innovation policy, this time a green one.

Like any concept, the staples trap has been interpreted in many ways. In an article as ambitious and wide-ranging as "A Staples Theory of Economic Growth," it is possible to pull out different facets. In my discussion, I have tried to argue that the institutional, evolutionary, and political insights within the article are critical for us to escape today's carbon trap and that an overly static and narrow understanding of linkages can be dangerous.

Fifty years on, Watkins' article still provides insight and clues into what we should do today. It deserves to be read and re-read.

The bibliography of references cited in this article is available here.

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