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Resource Endowments and Location Theory in Economic History: A Case Study of Quebec and Ontario at the Turn of the Twentieth Century

Published online by Cambridge University Press:  03 March 2009

Morris Altman
Morris Altman
Affiliation:
Assistant Professor of Economics at the University of Ottawa, 550 Cumberland, Ottawa, Ontario, KIN 6N5, Canada.
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Abstract

The hypothesis that a region's or nation's laggard industrial development can be explained by its relatively more expensive supplies of coal and iron ore is challenged here. A simple model, based on location theory, is developed. Using this model, I demonstrate the conditions under which this hypothesis holds. A case study of Quebec and Ontario industry suggests that the differential resource cost hypothesis seriously lacks explanatory power.

Type
Articles
Information
The Journal of Economic History , Volume 46 , Issue 4 , December 1986 , pp. 999 - 1009
Copyright
Copyright © The Economic History Association 1986

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References

1 Faucher, Albert and Lamontagne, Maurice, “History of Industrial Development,” in Rioux, Marcel and Martin, Yves, eds., French-Canadian Society (Toronto, 1964), vol. 1, pp. 259, 260, 264;Google Scholar initially published in Falardeau, Jean C., ed., Essays on Contemporary Quebec (Quebec, 1953), pp. 23–37. They refer largely to manufacturing development as opposed to the broader concept of industrial development.Google Scholar

2 Ibid., p. 264. Faucher and Lamontagne write: “Cultural factors had nothing to do with … the relative lethargy of Quebec's industry in comparison with that of Ontario: this difference is explained by the simple fact that Quebec, in the steel economy of that period, had no coal and no iron and was located too far from the Appalachian coal fields.” They conclude: “In an economy of coal and steel, when the locational factors were not favourable, [Quebec] developed less rapidly than other regions in a more advantageous position. On the other hand, when these factors became favourable, progress was immediately felt” (p. 268). Thus, prior to the predominance of the iron and steel economy, Quebec experienced a prosperity related to wood and shipbuilding. And after 1911, with the increased development of and emphasis upon hydroelectricity, with which Quebec was so well endowed, Quebec's industrial development was able to resume a relatively healthy economic demeanor, pp. 260, 265, 267. They also mention the distance from markets as a factor which potentially hindered Quebec's industrial development, but only in passing, p. 260. For Faucher and Lamontagne, what determined the changes in Quebec's development process over the nineteenth and twentieth centuries was, largely, changes in the type of resources critical to the development process.

3 Pollard, Sidney, Peaceful Conquest: The Industrialization of Europe, 1760–1970 (Oxford, 1982), p. 4, argues that economic historians tend to underrate the importance of natural resources to economic development, possibly as the result of the influence of theoretical economics. Pollard also argues that the location of coal in Britain was a necessary condition for its industrialization. But this last point remains to be demonstrated. My intention is to use a variant of location theory to establish the conditions where natural resources can be important to industrial development.Google Scholar

4 Faucher and Lamontagne base their arguments for Quebec's relatively poor industrial performance almost entirely upon literary sources. They argue: “Due to the scarcity and, in many instances, the complete absence of statistical data, our approach has to be non-quantitative,” “History of Industrial Development,” p.257. Using census material, Raynauld, André, Croissance et structure économique de la province du Québec (Quebec, 1961), pp. 29, 43–48, 55–57, finds that total manufacturing value added in Quebec and Ontario grew at a similar pace from 1870 to 1956 and that their manufacturing sectors developed similar structures. The difference in per capita manufacturing growth, in Ontario's favor, was the result of the faster rate of population growth in Quebec. Also using the censuses, I find that the manufacturing sector in Quebec lagged even further behind that of Ontario than is suggested by Raynauld.Google Scholar See Altman, Morris, “A Comparative Economic History of Quebec and Ontario, 1870–1910: An Analysis of the Statistical Sources” (Ph.D. diss., McGill University, 1984), vol. 1, p. 91; vol. 2, appendices D and I. Nominal manufacturing value added per capita in Quebec relative to Ontario fell from 87 to 75 percent from 1870 to 1910, while in real terms this ratio fell from 89 to 78 percent. I also find that the iron and steel products sector, so important to Faucher and Lamontagne, comprised 14.3 percent of the nominal manufacturing value added in 1870 and only 10.9 percent in 1910 in Quebec and 19.0 and 19.7 percent respectively in Ontario. This sector contributed 13.8 and 8.5 percent respectively to Quebec's manufacturing employment in 1870 and 1910 and 18.3 and 19.9 percent respectively to Ontario's,Google Scholar, ibid., vol. 2, appendix H.

5 One of the basic tenets of location theory is that, ceteris paribus, transfer costs play a determining role in the location of industry. The argument presented below flows from and is an attempt to extend the concepts in location theory eloquently illustrated in Hoover, Edgar M., The Location of Economic Activity (New York, 1963),Google Scholar chap. 3; Nourse, Hugh O., Regional Economics: A Study in the Economic Structure, Stability, and Growth of Regions (New York, 1968), pp. 74–85.Google Scholar

6 This is an extreme result following from my simplifying assumptions. More realistically, under these conditions, the most efficient firms in Quebec would survive. But these firms would be less profitable than firms of equal efficiency in Ontario.Google Scholar

7 Estall, R. C. and Buchanan, R. O., Industrial Activity and Economic Geography (London, 1972), pp. 62–64, make this argument.Google ScholarThe logic of this argument is to the extent that value is a rough proxy for weight when comparing inputs and outputs of a specific commodity; as the value of fuels diminishes relative to that of total output the weight of the fuels diminishes relative to that of total output. In this case, when the percentage of the value of fuels to the value of total output falls below 100, the cost of transporting fuels to Quebec falls below that of transporting the final output from Ontario to Quebec. Transfer costs protect Quebec firms from their higher fuel costs. However, if a dollar worth of fuel outweighs a dollar worth of final output, the critical point of 100 percent is too high. But it is likely that if this percentage falls as low as 10 percent the Estall and Buchanan argument would hold.Google Scholar

8 The argument can be expressed more precisely as Qa > 0, if [Ba + (Ia + WlbDlb) + WQaDQa]/Qa ≤ [Bb + (Ib + WIbDIb) + WQbDQb]/Qb. Total output in Quebec (Qa) exceeds zero if the unit cost of production of Quebec output produced for the Quebec market is less than or equal to the unit cost of Ontario output delivered to Quebec. The bracketed term is total delivered cost. Qb is total output in Ontario. Ba and Bb are the basic costs (largely labor) in Quebec and Ontario; Ia and Ib are the material input costs prior to delivery; and WIa and WIb are the weight of these inputs. B, I, and WI per unit of output are assumed equal in Quebec and Ontario. DIa and DIb are the distances which the material inputs must be transported to reach Quebec and Ontario multiplied by some identical price per ton mile. DIa is assumed to be positive and DIb, zero. WQIb and WQb are the weights of the final output produced in Quebec and Ontario for the Quebec market (assumed to be equal per unit of output), and DQa and DQb are the distances which the final output is transported to arrive in the Quebec market from Quebec and Ontario multiplied by some identical price per ton mile. This is assumed to be zero for Quebec and positive for Ontario. My assumptions allow the first equation to be reduced to: Qa > 0, if (WIaDIa/Qa) ≤ (WQbDQb/Qa). Since DIa and DQb are assumed to be equal, this equation can be reduced to, Qa > 0, if (WIa/Qa) ≥ (WIa/Qb). The per unit weights of inputs and output become the critical determinant of whether output in Quebec is positive.+0,+if+[Ba+++(Ia+++WlbDlb)+++WQaDQa]/Qa+≤+[Bb+++(Ib+++WIbDIb)+++WQbDQb]/Qb.+Total+output+in+Quebec+(Qa)+exceeds+zero+if+the+unit+cost+of+production+of+Quebec+output+produced+for+the+Quebec+market+is+less+than+or+equal+to+the+unit+cost+of+Ontario+output+delivered+to+Quebec.+The+bracketed+term+is+total+delivered+cost.+Qb+is+total+output+in+Ontario.+Ba+and+Bb+are+the+basic+costs+(largely+labor)+in+Quebec+and+Ontario;+Ia+and+Ib+are+the+material+input+costs+prior+to+delivery;+and+WIa+and+WIb+are+the+weight+of+these+inputs.+B,+I,+and+WI+per+unit+of+output+are+assumed+equal+in+Quebec+and+Ontario.+DIa+and+DIb+are+the+distances+which+the+material+inputs+must+be+transported+to+reach+Quebec+and+Ontario+multiplied+by+some+identical+price+per+ton+mile.+DIa+is+assumed+to+be+positive+and+DIb,+zero.+WQIb+and+WQb+are+the+weights+of+the+final+output+produced+in+Quebec+and+Ontario+for+the+Quebec+market+(assumed+to+be+equal+per+unit+of+output),+and+DQa+and+DQb+are+the+distances+which+the+final+output+is+transported+to+arrive+in+the+Quebec+market+from+Quebec+and+Ontario+multiplied+by+some+identical+price+per+ton+mile.+This+is+assumed+to+be+zero+for+Quebec+and+positive+for+Ontario.+My+assumptions+allow+the+first+equation+to+be+reduced+to:+Qa+>+0,+if+(WIaDIa/Qa)+≤+(WQbDQb/Qa).+Since+DIa+and+DQb+are+assumed+to+be+equal,+this+equation+can+be+reduced+to,+Qa+>+0,+if+(WIa/Qa)+≥+(WIa/Qb).+The+per+unit+weights+of+inputs+and+output+become+the+critical+determinant+of+whether+output+in+Quebec+is+positive.>Google Scholar

9 By the late nineteenth century one ton of coke was required to produce one ton of pig iron, and one ton of coal yielded 70 percent coke. Thus, one ton of pig iron required 1.43 tons of coal for its production. No more than 3 percent of the weight of coal was absorbed into the pig iron. For production of steel and iron and steel products the entire weight of coal was lost. Depending on the type of ore used, from 40 to 70 percent of the weight of the iron ore used to produce a ton of pig was lost in the process of production. Using the poorest of ores, it required 4.7 tons of coal and iron ore to produce one ton of pig iron. Using a higher grade of ore might have necessitated 3.1 tons of these inputs to produce one ton of pig iron. These estimates are derived fromGoogle ScholarPounds, J. G., The Geography of Iron and Steel (London, 1963), pp. 15, 20, 33, 65.Google Scholar

10 Donald, W. J. A., The Canadian Iron and Steel Industry: A Study in the Economic History of a Protected Industry (Boston, 1915), p. 60, states that in the 1850s and 1860s most of Canada's iron and products industry was based on imported pig iron. The same was true of the 1880s and 1890s (pp. 98, 100). From the statistical appendix provided by Donald, I compute that from 1884 to 1890 only 32.8 percent (on average) of the pig iron used in Canada was produced in Canada. In the 1891 to 1900 period the average increased to 52.4 percent, jumping to 79.7 percent during 1901 to 1910, p. 328.Google Scholar

11 See Pounds, The Geography of Iron and Steel, p. 70. When iron and steel are processed into iron and steel products, 40 to 60 percent of the inputs become scrap metal which, however, does not result in weight loss. Scrap is melted down and used, in turn, as inputs in production of iron and steel products.Google Scholar

12 For all manufacturing, the constant dollar cost of labor per unit of output in Quebec divided by that in Ontario was 0.90 in 1870, 1.00 in 1880 and 1890, and 1.05 in 1910. In terms of current dollars these ratios are: 0.88 in 1870, 0.93 in 1880, 1.02 in 1890, and 1.00 in 1910. For iron and steel products these ratios are 0.85 in 1870, 1.00 in 1880, 0.98 in 1890 and, 0.83 in 1910 for my constant dollar estimates. A similar story arises for most of the major manufacturing sectors. See Morris Altman, “‘X-efficiency’ and Differential Labor Productivity Growth: The Case of Quebec and Ontario, 1870–1910” (paper presented at the Eastern Economic Association Meetings, Philadelphia, 1986), appendix table 3.Google Scholar

13 See Nourse, Regional Economics, p. 76; and Estall and Buchanan, Industrial Activity, pp. 21–41.Google Scholar

14 It is impossible to determine the percentage of each province's output covered by the 1900 census. This census, however, provides data on the percentage of Canadian manufacturing output produced by firms employing less than five workers in 1890. No such information is available on a provincial basis. The percentage of such output is 21.5 percent (The Census of Canada, 1900–01, Ottawa, 1905, vol. 3). Using this information and data for firms employing less than five workers in 1915,Google ScholarBertram, Gordon W., “Historical Statistics on Growth and Structure of Manufacturing in Canada, 1870–1957,” in Henripin, J. and Asimakopulos, A., eds., Conferences on Statistics, 1962–1963, Papers (Toronto, 1964), p. 99, estimates that in 1900 firms employing more than four workers produced 87.8 percent of total manufacturing output in Canada. This assumes that the share of small firms in total output fell at a constant rate from 1890 to 1915. This percentage might be used as a very rough proxy for Quebec and Ontario.Google Scholar

15 From the 1900 census data, The Census of Canada, 1900–1901, vol. 3, 1 estimate a ton of coal in Quebec was $3.89 and $3.52 in Ontario or about 10 percent greater in Quebec. These estimates are derived by taking a weighted average of foreign and Canadian coal used in both provinces.Google Scholar

16 Altman, “A Comparative Economic History,” vol. 1, chap. 5.Google Scholar