The exogenous shock theory of economic development

In the early 1990s when I first started thinking about economic development I had a chat with a Quebec consultant who was helping the provincial government there develop economic growth strategies.  He was convinced the only way to grow was through ‘exogenous’ shocks which he defined as a big scale, brand new industry where substantial national and international investment flows into a province contrasted with organic growth by trying to encourage local firm expansion.

This was the reason Quebec put the most aggressive tax breaks/R&D support for pharmaceutical development in the 1980s and 1990s and, presumably, why they have the most lucrative incentives for digital media in North America.  I read somewhere that one firm, Ubisoft, has benefited from $200 million worth of incentives.

The natural resources boom in Saskatchewan is an example of this.    Market prices for commodities rise, the province puts in support for the industry and boom – uranium, potash, fracked oil, etc. power Saskatchewan to one of the fastest growing provinces or states in North America (BTW NB has natural gas, potash and uranium deposits).

A massive inflow of people and their investment dollars can be an exogenous shock – think of the amount of flow into British Columbia at the time of the Hong Kong transfer back to China.

Of course, local firms benefit from efforts to attract exogenous investment. Many of Quebec’s most interesting bio/pharma firms are startups that evolved from the 30 year effort to attract pharma investment.

The only big example of this effect in New Brunswick was the contact centre/back office sector.  While we have attracted investment into other sectors, none really rise to the level of making a serious impact on the economy.    Aquaculture was a fast growing sector but it was mostly from within.  Blueberries too although I think the attraction of national and international investment into value added processing is likely going to be key to long term growth in the sector.

I think there is some credence to this theory.   Economies grow by increased investment and trade and the secondary effects that come from that primary growth (e.g. population growth).  Governments should be very focused on how the policy environment can support exogenous growth – although there is considerable debate about the merits of deep incentives/tax breaks as a long term economic development tool.

New Brunswick is trying this approach – at least at a moderate scale – with cybersecurity, cannabis and the Smart Grid.  There have been national and international firms investing in those sectors.   Whether any of them will get to a place where NB is known internationally is yet to be seen.