San José State University
Department of Economics
Thayer Watkins
Silicon Valley
& Tornado Alley

The Economic History and
Regional Economic Policy of Canada

The Economic History of Canada

The economic history of Canada generally parallels that of the United States, sometimes literally. The area that is now Canada had vast expanses of land, some of which was filled with marketable plant, animal and mineral resources. The literature on the economic history of Canada emphasizes the searches for staple products; i.e., extractive products such as animal furs, timber, grain and petroleum and natural gas. The economic historian Harold Innis was the initial proponent of the staple theory of Canadian economic history.

In the initial settlements by the French in the St. Lawrence River Valley and Acadia (what is now Nova Scotia) there was a tendency for reliance on subsistence agriculture. Fur trapping and trading in Quebec and fishing in Acadia provided exports to pay for the needed imports. The fur trade, particularly for beaver pelts, was lucrative but limited. The more enduring extractive industry for Quebec was for timber.

Geopolitical forces resulted in the successive losses of French control in North America to the British. The British captured Quebec and Acadia. The British distrusted the French Acadians and expelled them. Some of them made their way to Louisiana and subsequently were known as the Cajuns. The places vacated by the Acadians were filled with migrants from Scotland and Acadia became known as Nova Scotia (New Scotland). There was also an influx of Loyalists from what became the United States and the area of Nova Scotia where these migrants settled was split off to become New Brunswick.

The area of the lower St. Lawrence River Valley became Lower Canada. The upper reaches of the St. Lawrence and the area north of the Great Lakes became Upper Canada.

The modern nation of Canada was assembled from British colonies over a considerable period of time. The basic core of Canada was created with the British North America Act in 1867. This consisted of Upper Canada (Ontario), Lower Canada (Quebec) with the Maritime Pronvices of Nova Scotia and New Brunswick along with the arctic territories controlled by the Hudson Bay Company. Prince Edward Island and Newfoundland declined to join at that time. Nova Scotia and New Brunswick had to be promised a railroad connecting them with the Montreal area.

The Province of Manitoba was created in 1871. The settlements at Vancouver and Victoria also in 1871 became the Province of British Columbia. Just as Nova Scotia and New Brunswick were promised a railroad British Columbia was promised a transcontinental railroad.

The government of Prince Edward Island subsequently decided to join the Dominion of Canadan in 1874. The Province of Newfoundland, consisting of the island of Newfoundland and the territory of Labrador, did not join the confederation until 1949.

The motivation for the formation of the confederation in 1867 was, in part, a distrust of the United States. During the War of 1812 the U.S. had sent an invasion force into Canada and the War with Mexico in 1846-48 had not allayed fears of U.S. expansionism. There was talk in the U.S. that Manifest Destiny meant not just expansion to the Pacific Coast but the control of all of North America. This British and Canadian fear about U.S. expansionism expressed itself in the requirement that the railroad linking the conferation together should take routes well inside of Canadian territory. There was a high cost to the fulfilling this requirement. The Canadian Pacific Railroad did not have to be built, at least at the early stage that it was. A link of wester Canada to eastern Canada could have been achieved relatively cheaply by linking those parts of Canada to the U.S. transcontinental railroads. Thus political changes and considerations affected the economic development of Canada.

The first staple of the Canadian region, as mentioned previously, was furs. Next came timber. The logs were squared for convenient storage and to eliminate waste but not cut into sawn lumber. In the early days of the nineteenth century there was a tariff on timber imports to Britain, but Canada as a member of the British Empire had a lower tariff than American timber exporters and benefited accordingly. Around 1850 Britain adopted free trade and eliminated the tariff altogether. There was fear that Canadian timber exporters would lose out to non-Empire producers but that fear proved groundless. The timber exports of Canada continued to grow.

Canada developed a dairying and livestock industry. Not only did this provide exports for Europe and the United States but later a good industry developed in selling feeder cattle to the U.S. where the costs of feed were lower.

Canada is too far north to grow corn, but wheat grows well. The 1890's saw the emergence of wheat as a major staple crop for Canada. This was the result of higher prices for wheat and the development of a special variety of wheat called red fyfe that was better suited to the short growing season of Canada and the low rainfall of the Praire Provinces. Wheat growing fueled a strong expansion of the Canadian economy that lasted up to the onset of the Great Depression of the 1930's.

The Regional Economic Development Policies of Canada

The Regions of Canada

Canada is a well developed market economy but it is fragmented. The industrial heartland is the Province of Ontario with Toronto its major urban center. Quebec is not much below Ontario in economic development, but the French-English division creates a special problem in political economy. The province of British Columbia is prosperous and dynamic but not strongly linked with the economy of central Canada. The economies of the prairie provinces of Alberta, Saskatchewan, and Manitoba are healthy, but do not have the same potential for economic development that Ontario has experienced. The maritime provinces of Newfoundland, New Brunswick, Nova Scotia, and Prince Edward Island have lagged in economic development for decades. Their industries of agriculture, logging, and fishing are at best stagnant and at worst dying. Regional economic development policy in Canada generally has its origins in the attempt to improve the standard of living in the maritime provinces. In addition to the problem provinces there are problem areas in the other provinces, such as the Gaspé Peninsula in Quebec.

Regional Policy

Public policy in Canada is often torn between nation building and province building. After World War II there were several government programs that were of the nation-building sort, such as the Trans-Canada Highway. Air Canada and the Canadian Broadcasting Network were other examples. In the 1960's province building took precedence over nation building. By the 1980's the national government in Ottawa under Pierre Trudeau sought to reassert the priority of nation building over the decentralization that had taken place.

Regional development policy was initiated in 1960 by tax incentives for firms that would locate in designated areas of high unemployment and slow growth. This was soon followed by the Agriculture Rehabilitation and Development Act (ARDA). ARDA attempted to increase incomes in rural areas by providing assistance for the use of marginal land, creating work opportunities, developing water resources, and setting up projects for other industries. In 1966 ARDA was renamed Agricultural and Rural Development Act and began to promote non-agricultural projects in rural area to absorb surplus labor from agriculture. In 1966 the Fund for Rural Economic Development (FRED) was created to deal with low income and problems of economic adjustment. Five regions were designated for aid:

Another arm of Canada's regional development policy was the Atlantic Development Board which soon received a fund of $186 million to administer.

Trudeau gave Jean Marchand of Quebec responsibility for creating a regional development program. Marchand chose to set up the Department of Regional Economic Expansion (DREE).

The Department of Regional Economic Expansion (DREE)

Marchand and the other top officials of DREE accepted Francois Perroux's theory of growth poles. Two programs were set up: a "special areas" program and a "regional industrial incentives" program. The special areas program sponsored and funded such projects as highways, water systems, industrial parks, sewer systems and schools. The regional incentives program provided grants to companies on the basis of the new jobs created in designated regions. Later loan guarantees were provided in addition to outright grants.

Marchand targeted the Atlantic maritime provinces and eastern Quebec. He said that if DREE spent less than 80 percent of its budget in this area it would be failing in its purpose. DREE didn't achieve this target figure of 80 percent but it devoted about 50 percent to the target area.

DREE was criticized for discriminating in favor of certain communities and against others. After four years there was no convincing evidence that it had accomplished anything in the way of reducing regional disparities.

The economist Benjamin Higgins stated that "perhaps never in the history of economic thought has so much government activity taken place and so much money been invested on the foundation of so confused a concept as the growth pole became in the late 1960's and early 1970's.

The Trudeau government suffered a political setback in 1972 with losses in western Canada particularly heavy. In order to counter criticism that the problems of the non-maritime provinces were being ignored Trudeau took away the focus of DREE on eastern Canada replaced Jean Marchand as head of DREE with Don Jamieson of Newfoundland. General Development Agreements (GDA's) between the federal and provincial governments were created and DREE was decentralized. Under the GDA's the provincial governments came to the federal government with proposed projects, which the federal government could support or reject. In Newfoundland projects for virtually every sector of the economy were initiated under the GDA. Between 1974 and 1982, 130 agreements were made under these programs throughout Canada, with a financial committment of close to $6 billion. The costs were shared but 80 to 90 percent of the funding for these projects was federal.

By 1980 DREE had started thinking in term of extremely large projects for energy development, so-called "megaprojects." In 1982, however, DREE and the GDA's were disbanded. A new Ministry of State for Regional and Economic Development (MSERD) was created and within it a Department of Regional Industrial Expansion (DRIE). The GDA's were replaced with Economic and Regional Development Agreements (ERDA's).

After 15 years in power the Trudeau government's programs of regional development had relatively little effect. Some programs tended to encourage capital-intensive development that worked against the goal of job creation.

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