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Report On Business To capitalize on Canada’s natural resources, stop borrowing from tomorrow to fund today

This is one of the winning entries in the New Diplomacy of Natural Resources program launched by the United Nations Association of Canada. The program brings university students together with representatives from industry, aboriginal groups, government and environmental organizations to learn about, and recommend, new approaches to the development of natural resources.

The depletion of natural capital through one-off cash flows has come to characterize natural resource development in Canada. Throughout most of Canada the stewardship of revenues from natural resource development is akin to borrowing from Peter to pay Paul.

In order to fully optimize Canada's strategic niche and promote the sustainable development of Canada's natural resources, a sovereign wealth fund should be established in order to stop borrowing from tomorrow to fund today.

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Canada's competitive advantage is its abundance of natural resources. Much of this abundance is available in non-renewable. Canada leads the world in mining and possesses the third-largest oil reserves in the world. Domestically, natural resource development accounts for 19 per cent of Canada's gross domestic produce and plays a crucial role in Canada's economic growth. Natural resource development is Canada's strategic niche that we should seek to optimize in the coming years.

Opportunity for this is ripe. Global demand for energy is projected to increase 33 per cent by 2035 and forecasts project more than $650-billion in investments in natural resource projects in Canada over the next decade. But before we all stand blinded by dollar signs, the question must be asked – what is the cost and where will the benefits flow?

If we view the benefits of natural resource development through the lens of dollars and cents then we must too view the costs associated with running down natural capital. By treating revenues from resource development as income, Canada is selling its assets and competitive advantage without compensating the loss of natural capital.

The Great Law of the Iroquois holds intergenerational equity in decision-making and sustainable living in current generations for the benefit of seven generations into the future. This concept is present in the Government of Canada's definition of sustainable development as meeting the needs of today without compromising the needs of future generations, while promoting the efficient use of resources to advance long-term economic competitiveness.

A sovereign wealth fund can assist in accomplishing both, while still allowing Canada to exploit its strategic niche.

As demand grows for natural resources, 60 per cent over the next 20 years, Canada's earning potential is great. The creation of a sovereign wealth fund promotes sustainable long-term capital growth through a clear means of attaining a return on state assets in natural resources by separating revenues from natural resources from state budgets. If natural resource revenues accrued from royalties and taxes are invested, then these revenues become assets. These assets can in turn generate revenue from other sources. This facilitates the capacity for investment in diversification of non-renewable commodity exports and therefore promotes long-term economic competitiveness.

The Government Pension Fund of Norway is an excellent example of the potential of sovereign wealth funds to advance long-term economic interests by developing capital that has offset the loss of natural capital. It was created to invest parts of surpluses generated from the Norwegian petroleum sector. It is now the largest pension fund in the world. Since 1990 it has accumulated $893-billion (U.S.) in assets and holds 1 per cent of global equity markets. It is said to be the largest stock owner in Europe, holding 1.78 per cent of European stocks.

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Like Norway, Canada could optimize its strategic niche through the creation of a sovereign wealth fund. A sovereign wealth fund provides the capacity to maintain a high level of ongoing permanent expenditure and increase savings for future generations. This would promote intergenerational equity by allowing Canada to exploit its resources, taking advantage of economic opportunities that present themselves today without compromising future generations.

Exploiting resources without investing in other forms of capital fails to fully harness the potential of Canada's strategic niche. A sovereign wealth fund promotes long-term economic competitiveness while maintaining responsible stewardship of our natural resources for future generations. Canada's natural capital should not be treated as an unending "slush fund." Current stewardship of resource revenues take from today and neglect tomorrow. Let's optimize Canada's natural resources as a strategic niche and promote long-term economic competitiveness and social justice.

Let's stop borrowing from Peter to pay Paul.

This article has been edited and condensed for publication

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If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

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