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opinion

Collapsed prices, a looming recession, calls for a development moratorium, halting federal action on emissions – the oil sands are under pressure on many fronts. In coming days, contributors will offer views on how Canada's energy sector can move forward in a changing world. Today: economic diversification.

Joseph Doucet is Stanley A. Milner professor and dean of the Alberta School of Business.

These are interesting times for Alberta: uncertainty in commodity price cycles, challenging market realities for many of our exports – not just energy – and a new provincial government with an ambitious policy agenda.

Among Premier Rachel Notley's very first public statements were reassurances to the energy sector that her government will consult and work "collaboratively" with the sector – an explicit, and welcome, recognition of the key role energy and resource industries play in Alberta's economy and in the government's fiscal reality.

Some have suggested the need for a concerted, policy-driven effort to diversify Alberta's economy. Calls for greater diversification are not new, of course – although they have tended to be quieter in the good years.

Diversifying an economy is easier said than done. Economic activity, private sector investment and the "structure" of an economy evolve over time and are difficult to co-ordinate. At least, they are if one wants to be successful – there are all too many examples of failed central planning.

Indeed, business cases are full of examples of costly and unsuccessful diversification plans and industrial policies. Ontario's 2009 Green Energy Act hasn't created the manufacturing jobs or technologies promised, but it has run afoul of World Trade Organization rules. Quebec continues to offer electricity to large industrial users at ridiculously low rates, with little value-added manufacturing to show for it. Alberta's own governments have not been immune to the diversification dream, as demonstrated by investments in meat packing and forestry in the 1980s and 1990s.

Diversification should be based on a clear understanding of where and how Alberta-based firms can compete profitably and sustainably in a global marketplace. We must also understand that to be successful, we have to compete – both in selling our goods and services abroad and in attracting the investments and skilled people to do the work. Developing a new sector or focus must be based on a rational expectation of a potential comparative advantage.

Alberta's government must look purposefully and strategically at our provincial economy and do everything it can to encourage and facilitate sustainable growth, employment, wealth creation and quality of life. Where it makes sense, greater diversification should be pursued. But our overarching goal is sustainable wealth creation and prosperity, not diversification per se. It makes no sense to diversify out of principle.

The structure of an economy – what industries exist and what is produced, how technologies are used, from where goods and services are imported and exported to – is the result of countless decisions made by both private and public players. A government will set many of the rules, but it will also invest a great deal, largely through public infrastructure. The private sector invests in productive assets – factories, equipment, technologies and people. In most developed economies, private sector investment is much larger than public sector investment. This is the case in Canada, and particularly so in Alberta.

A successful economy will produce goods and services that can be sold in other markets, and in doing so, creates value for many people and the government. Private investors benefit from successful investments, governments receive revenue generated from economic activity that allow them to offer services, and residents benefit through employment, services and "quality of life" created by these economic conditions. A robust economy makes it possible to deliver strong social outcomes, including health, education and environmental security.

Alberta's economy has created a great deal of benefit over the past few decades, much of it by producing energy products.

Of course, national or regional economic success is not independent of "local factors" such as natural resources and geography, culture and history, policy and regulation, and proximity to markets, to name a few. These types of factors actually go a long way to explaining Alberta's economic makeup and its relative focus on energy and resources. And to a large extent, that focus has been beneficial for Albertans.

So if we are to diversify, at least partly by way of explicit policy decisions, we need to ask some important questions. What sectors should be developed? How will this occur? Who will invest to create new jobs, or technologies, and at what cost?

The energy sector has flourished in Alberta in part because of our wealth of resources and the proximity to the U.S. market. But, if we start thinking about diversifying away from energy, we need to recognize that we've developed our energy sector not just because of the availability of raw resources. It is also because we have attracted financial capital and smart people, and we've developed a lot of world-class technology. But all these inputs are mobile in a global economy. If we are to diversify, we need to ask how we might compete with every other jurisdiction that wants to do the same.

Alberta's future should include non-energy sectors where we have been successful or legitimately believe that we can compete globally. This will likely include biomedical industries, value-added foods and information technologies, to name just three. But our future should also include diversification within energy – continuing to develop new technologies that grow markets and value, based on our recognized and established expertise. This includes environmental applications, sophisticated materials and energy, and environmental regulation and governance.

Government should be focused on leveraging our entrepreneurial spirit and strong innovative culture, as well as our buoyant private sector and risk-takers. Finally, we need to continue to focus on all levels of education and training, to ensure that we have the qualified work force to attract investors and manage our resources. Our most important resource remains our people.

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