We Need More (not less) Wood Manufacturing in BC – Part 3
By Peter Ewart
Tuesday, April 06, 2010 03:44 AM
By Peter Ewart
Why is manufacturing so important to the economy of a country? As discussed in previous installments in this series (see Part 1 and Part 2), there are those, like Alan Greenspan, the former Chairman of the U.S. Federal Reserve bank, and various politicians, who appear to not give it much importance. If mills and factories are shut down, workers and their communities will be simply “marked for exit” as one Vancouver-based economist once put it or should find some other occupation or focus.
According to many establishment economists, we are living in a “post-industrial” society, or at least we are moving in that direction. Industries like forestry and steel are “sunset” industries whose future is only further decline. Indeed, if these industries fade away, they can simply be replaced with jobs in tourism, financial services or some other non-manufacturing sector. In this line of thinking, economically speaking, there is no difference between the manufacturing sector and these other sectors in terms of effect on the national economy. Either implicitly or explicitly, such thinking has become a mantra.
But is this “mantra” true? Or is it simply a cover for monopolies and multinationals to outsource, dismantle and shut down manufacturing facilities across the province and country?
To answer this question, we need to first look at how and where products that are exchanged in society, such as those made of wood or steel, actually acquire value. And, furthermore, who is the recipient of that value.
How can it be that objects or substances existing in nature such as a tree or a deposit of iron ore are transformed into planks of wood or ingots of steel, and in the process somehow, almost magically, acquire “added value”. What is the “magic” ingredient that performs this miracle?
Indeed, it is the work of human beings acting on nature and transforming raw material into products for use that is the fountain of all “added value”. Specifically, in the case of forestry and steel, it is the labour of workers who tend, harvest, mill and process the wood, as well as mine and process the iron ore. Nowhere is this more evident than in modern manufacturing. Compared to even 50 years ago, the modern workforce using advanced machinery has a colossal output, with each worker capable of producing phenomenal amounts of product, whether it be dimension lumber, pulp and paper, secondary wood or other items.
The various steps in processing wood or steel can be compared to the links in a long chain. At each link, “added value” is created by labour acting on nature.
Where does this “added value” go? At each “link”, there are three sectors of society that lay claim to portions of this “added value.” These three sectors are: (1) workers, employees and other staff (in the form of wages, salaries and benefits); (2) companies (in the form of profit); (3) and government (in the form of personal and corporate taxes, fees and other payments). It is, of course, from the government portion of this “added value” that revenues for services such as education, health and social services are mainly derived.
By way of example, let’s look at the “links” in the “chain” of the processing of a tree in the forest industry. One possible chain (there are others, depending on the division of forest industry) might consist of the following “links”: (a) tending and harvesting of the tree (b) transporting the log (c) processing into dimension lumber (d) further processing into a secondary wood product (which itself could be broken down into smaller links or stages of production), and so on.
The point is that, at each “stage” or “link” in the manufacturing chain, whether (a) or (b) or (c) or (d), “added value” is being created, which is portioned up between workers / staff, companies and government. That being the case, it follows then that the more “links” and the longer the manufacturing “chain” in a particular province or country, the stronger that economy will tend to be, i.e., more jobs, more profits, more government revenues.
Which brings us to the role of the service sector. A modern manufacturing economy requires an advanced and highly developed service sector, whether this be educational and scientific facilities, health care, or social services, as well as retail, business and industrial services of various kinds. In themselves, these services do not generate “added value” to the extent that the resource extraction, processing and secondary manufacturing sectors do. Nonetheless, they are crucial for these sectors to operate at a modern and efficient level as modern manufacturing and a highly developed service infrastructure are inextricably linked.
However, is it the case that manufacturing facilities can simply be shut down and service sector jobs substituted to fill the vacuum? Are there no economic repercussions as various politicians and “post-industrial” economists claim?
Tourism is often cited as a substitute for manufacturing, either implicitly or explicitly. In British Columbia, it has been an implicit part of government policy that tourism as a service sector industry has had the highest priority. Witness the huge amount of attention and the billions of dollars over the last ten years that were focused on the Olympics extravaganza. During this same period of time, of course, the once giant forest manufacturing industry in the province has fallen off a cliff. Only fools (and some politicians and economists) will claim there will be no repercussions from this dramatic shift.
Now it is true that tourism does bring revenue to the province. But it does not create “added value” in the way or to the extent that wood manufacturing does. Why? For one thing, it is primarily a service sector industry. For another, the dollar that the tourist spends in British Columbia was generated from a “value chain” that is based far away in some other region or country. Thus British Columbia misses most of the “links” in that chain, and all the “added value” that was created from those “links” in the tourist’s country of origin. In effect, British Columbia only gets the tail end of a foreign-based value chain.
Now, it is true that “added value” is created (for the construction workers, companies and government) when, for example, tourist facilities are constructed. But the creation of any substantial new value ceases once the construction ends, i.e., the tourist facility becomes a “service”.
All of the above is why economies that are based on tourism tend to be quite weak, with relatively low wages, under-developed infrastructure, skewed economy, and so on. There is just not enough “added value” created in such economies.
Conversely, as a general principle, economies that have a well-developed manufacturing sector (with long “value chains”) tend to be much stronger and more resilient.
This is not to say that the development of tourism as an industry should be avoided as an economic aim. Many people in the province work in that sector and it plays a significant role in the GDP of some parts of the province. The problem arises when it, or some other non-manufacturing sector, is presented as an equivalent substitute for manufacturing.
And there are additional issues as well. The existing wood manufacturing industry in BC itself needs to be expanded if more “added value” is to be captured. For example, especially in some regions of the province, the primary sector (dimension lumber, pulp and paper) is highly developed, whereas the secondary wood sector is stunted or in some regions almost non-existent.
The same is true for the resource extraction industry as a whole, whether it be minerals, metals, oil and gas, or hydro-electric energy. When raw logs, unprocessed minerals, unrefined crude oil and other resources are shipped out of communities and out of the province, potential links in the “added value” chain are lost, and along with them, revenue and jobs.
What is also quite astounding, given the substantial forest industry in BC, is the lack of a highly developed wood and forestry machine industry in the province, an industry which in itself constitutes another long “chain” of “added value” with its own particular “links”, including iron ore mining (British Columbia and Western Canada have substantial deposits), smelting, steel production (requires cheap energy which BC has abundant supplies of), machining, tool and die, electronics, and so on.
It goes without saying that an extended forest manufacturing chain, as well as a machine building chain, would give rise to a diverse and many layered scientific, technical and educational infrastructure and service sector, all of which would contribute to the solidity and all-sidedness of the provincial economy. Take away or shorten the manufacturing chain and this infrastructure will eventually deflate, as can be seen with the closure of industry suppliers, research facilities, contractors and technical support across the country. The loss of all of this, coupled with the loss of a trained manufacturing workforce, is a huge blow to the productive capacity and to the future of the country itself.
However, the theoreticians of globalization, who are often in the direct pay of multinational corporations, argue that the “out sourcing” of manufacturing whereby the raw materials are shipped out of one country, for processing in another, and assembly in still another, and so on, is somehow good for a province like British Columbia or a country like Canada. What they don’t like to talk about is all the jobs and all the links of “added value” that are lost.
So how can we extend and expand wood manufacturing (as well as other resource manufacturing) in order to lengthen the “value chain”, capture more “added value”, create more jobs, strengthen communities, and build our province and nation? Unlike David Emerson, former forestry CEO and federal cabinet minister, we need to have a vision of the province and the country that goes far beyond “hewers of wood and drawers of water”, one that aims to re-industrialize, not de-industrialize the economy, one that aims for all-sided, not one-sided, development.
One thing for sure – such a shift won’t come without a fight. But it is a fight that should be and must be fought. More on that issue in future articles in this series.
Peter Ewart is a writer and community activist based in Prince George, British Columbia, Canada. He can be reached at: peter.ewart@shaw.ca
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Posted by: MrPG on April 6 2010 5:22 PM
Yes, you can profitably subtract value from the timber resource particularly when through high volumetric efficiency or lack of innovation, or market savvy or care, you convert logs capable of being processed into very high value lumber into low value commodity lumber types and sizes that tend to preclude opportunity for further domestic value enhancement.
In BC we have a tradition of profitably smashing our forest diamonds into first rate export sandpaper rather than faceting them into valuable jewels. You'd think we had a low grade timber resource rather than a public religious commitment to easy risk free profits for low value commodity manufacturers.
We live in a society with pretty shallow economic assumptions, one of which is that what is good for the company is good enough for society, good enough for the environment and good enough for the resource.
In BC, what is good for the forest resource licensee is to be entitled to iron clad security of resource access at total costs which will allow for minimizing risk and maximizing profit by engaging in a global market for cheap commodities that will price and convey the hidden "value-added" opportunity often included in our commodity products but for economic exploitation at export destinations rather than through domestic secondary manufacturing.
Yes, the BC forest industry creates fabulous value-added opportunities but at commodity lumber export destinations.
Most of the "value-added" processing activity in BC (in terms of wood volume) is the result of using government incentives (read bribes) to encourage companies to slightly increase added-value by offering reduced stumpage (or increased subsidies, timber access, security of tenure or reduced obligations) to build showplace "potemkin" factories and jobs for more apparent than real secondary manufacturing.
In BC, if we have learned anything over the last 30 years of pragmatic forest policy it is that you can't bribe someone to operate a profitable secondary manufacturing business, all you are doing is creating an attractive market for incentives and producing a cargo culture of value-added appearances.
Is there a solution? Yeah, tough love. Reduce guaranteed timber access, tenure security, subsidies and bribes to the point that bribe addicted companies fallout of the industry in favour of hungry, innovative, timber and lumber market savvy, risk challenging competitors. Also, we must quit allowing licensees to include the timber tenure as though it were a bank act receivable asset of the company rather than a asset of the public intended to create a business opportunity rather than provided to underwrite debt for selected winners and bankers.
Faking value-added is annually losing the BC economy billions in jobs, services and trade opportunity but it is keeping a lot of rich tired farts fat with risk free timber while pumping-up the economy of export destinations.
Michael Major\\