Economic Impact of Marine Related Activities in Canada

Methodology

1. The ocean economy

This study is concerned with estimating the economic impact of marine activities. More specifically, it is concerned with the economic impact of marine activities occurring within Canada's economic zone in the Atlantic, Pacific and Arctic Oceans.

The marine economy includes those individual, industrial and administrative activities dependent on or related to the ocean. This is neither a precise nor a technical definition, but one that serves as a practical guide for identification of relevant marine activities. The list includes direct and indirect activities in the private and public sectors that are identified as either primary or secondary according to their relative economic importance and the state of knowledge about the activity (Table 2.1):

• Primary marine activities: these represent the core of the marine economy; industries deriving their economic rationale in a direct way from their extractive or non-extractive use of marine resources. Such activities include fishing, offshore oil & gas, ship and boat building and repair, water transportation, and marine construction. It also includes federal and provincial departments and agencies with management and administrative responsibilities over ocean uses.
• Secondary marine activities: these may be industries in their own right or form part of a broader industry grouping. Though their contribution to the economy may be picked up as indirect impacts by an economic model, they are singled out for attention in this study in order to shed more light on the nature and scope of the activity and the linkages with other sectors of the economy.
  
  The original intention was to conduct an analysis of the potential economic value of six of the secondary activities identified with an "X" in Table 2.1. As it turned out, three of the activities could be included in the full economic impact analysis as though they were primary activities. This is the case with Support Services for Oil and Gas Extraction (NAICS 213), coastal tourism and recreation (NAICS 4872) and Environmental Non- Governmental Organizations (ENGOs). This level of analysis became possible because sufficient data were obtained or developed to allow the impact methodology to be applied.
  
  A full economic impact analysis could not be carried out for the other three activities: subsistence fishing, refining and pipeline transportation. This is mainly because of data limitations. Nonetheless, each is described, with a discussion of possible analytical approaches, data requirements and challenges.

Table 2.1a: Relevant marine sectors for economic impact analysis by industries

NAICS #	Industry	Focus of Analysis
		Primary	Secondary
Seafood
114	Fishing	X
1125	Aquaculture	X
3117	Processing	X
-	Subsistence fishing		X
Offshore Oil & Gas
211	Exploration-Extraction	X
213	Support services		X
32411	Refineries		X
486	Pipeline transportation		X
Marine Transportation
4831	Freight & passenger transportation	X
4883	Support services for marine transportation	X
Ocean-Based Recreation/Leisure
-	Recreational fishing	X
4831	Cruise Ship Travel	X
4872	Coastal tourism/recreation		X
Marine Construction
23712	Oil & Gas facilities installation	X
23799	Ports, harbours & marine works	X
Manufacturing
33451	Navigation & guidance equipment	X
3366	Ship & boat building	X
Services
5416	Professional Services/Env Consulting	X

Table 2.1b: Relevant marine sectors for economic impact analysis by departments

Department	Focus of Analysis
	Primary	Secondary
Federal Government
Fisheries and Oceans	X
National Defence	X
Transport Canada	X
Environment Canada	X
Parks Canada	X
Natural Sciences & Engineering Research Council	X
Indian and Northern Affairs	X
Natural Resources Canada	X
Canadian Food Inspection Agency	X
Provincial/Territorial Government
Fisheries & Aquaculture	X
Transport/Ferries	X
Energy	X
Universities and research
-	X
ENGOs
-		X

2. Measuring Impacts

Reporting on marine activities begins with a descriptive profile of each, setting out its nature and economic characteristics and providing an overview of its linkages with other marine sectors and the economy more generally. Key factors affecting activity performance and trends are discussed and quantified using industry-specific indicators. Relevant factors include resource conditions and markets, with performance measured using such indicators as production, number of establishments, employment and exports.

Following conventional practice, the economic impact is measured with three indicators:

• GDP: an industry's contribution to Gross Domestic Product represents its broadest measure of economic impact. The domestic product of an industry captures the value it adds to purchased inputs through the application of labour and capital. GDP represents the sum of the value added by each industry. Value added should not be confused with output value, since the latter would include the value of purchased inputs.
• Labour income: this captures payments in the form of wages and salaries (and shares of revenue in the case of fishing vessel crews) earned in the marine industries. Returns to labour in the form of wages, salaries and earnings form a key component of GDP. Industries paying relatively high average wages and salaries generate a correspondingly higher economic impact than industries paying lower average incomes.
• Employment: industry employment is important politically because of the significance generally attached to jobs, but from an economic impact perspective, the significance lies in the economic impact generated through the spending of employment income. The greater the employment and higher the average income, the more significant the industry in terms of economic impact. Unless otherwise indicated, employment is measured in full-time equivalents (FTE).

Economic impacts are generated through direct, indirect and induced demand in the economy expressed in terms of industry and consumer purchases of goods and services.

• Direct impact: refers to impact arising from the expenditures made by firms in the subject industries on the goods and services needed to produce industry outputs. For example, the fishing industry buys nets and traps from manufacturers; water transportation buys fuel from refineries.
• Indirect impact: refers to the inter-industry purchases triggered by the direct demand. For example, net makers buy monofilament line from manufacturers; refineries buy services from maintenance contractors; catering companies buy basic food products. These industries in turn buy more basic goods and services, and so on.
• Induced demand: refers to the demand created in the broader economy through consumer spending of incomes earned by those employed in direct and indirect activities. It may take a year or more for these rounds of consumer spending to work their way through an economy.

The sum of impacts flowing from each level of demand gives the overall economic impact of Canada's marine sectors. Generally, the greater the domestic supply capability at each level, the greater will be the economic impact. Conversely, the higher the import content, the weaker the domestic industry response (multipliers) and the lower the impact.

Quantifying economic impacts, then, begins with comprehensive data on the gross value of output for each of the marine activities selected for analysis. For private sector activities, gross value of output means revenues generated through sales; for public sector activities, gross value of output corresponds to total expenditures. As the expenditures needed to produce the output work their way through the economy, they generate the GDP, employment and labour income the study aims to quantify.

Economists rely on economic models to quantify impacts at a national, regional or provincial level. Models provide a simplified view of the economy, expressing the myriad demand and supply transactions in the productive process as a set of coefficients or quantitative relationships. These coefficients are based on empirical measurement of flows in the real economy.

This study uses an input-output model, specifically, the Statistics Canada Inter-provincial Input- Output Model (2005 version) to generate the economic impacts. The use of an input-output (I-O) model is considered most appropriate for this study because:

• An I-O model is capable of producing the desired outputs – the direct, indirect and induced impacts, provided it has "open" and "closed" versions. Running the open version allows labour income to "leak" out of the economy, with impacts confined to indirect effects. Running the closed version forces labour income to flow through the economy, resulting in an aggregate measure of indirect and induced impacts. The difference between the two runs represents the measure of induced impact. To determine induced impacts, Statistics Canada applies what it refers to as a partial closure of the model. This essentially captures first-round induced spending impacts, resulting in a conservative impact estimate.
• The I-O model is a matrix capturing inter-industry flows of purchases and sales, thus allowing impacts to be measured and reported at the highest resolution. General equilibrium and economic base models are structured at an aggregate economic level, lacking the sensitivity to accept industry-specific "shocks" and unable to produce industry-specific results.

To run the I-O model, Statistics Canada would raise industry expenditures by an arbitrary amount – typically $10 million – thus triggering the inter-industry flows of purchases and sales resulting in direct and indirect impacts. The impacts would be grossed up according to the ratio of the actual value of industry output (final demand) to the arbitrary $10 million shock.

Two disadvantages of using an I-O model are commonly cited: linearity of results and static inter-industry coefficients.

• Linearity of results implies that the economy does not encounter production constraints since the model will produce constant results according to the fixed coefficients embedded in it. This is a valid concern, though not one that affects this study given its scope and objectives (the study is not trying to measure the impact of a major change in expenditures that would be inconsistent with inter-industry relationships embodied in the I-O model).
• Static coefficients imply lack of technological innovation and no shifts in spending as a result of global competition. This is a valid concern if the model is not up-dated regularly. But given how slowly structural change occurs in an economy, as long as the model relies on industry data no more than 3-4 years old, such dynamic effects would be reflected in the coefficients. The Statistics Canada Inter-provincial Input-Output Model meets this test since just one year separates the model version (2005) from the impact year (2006). It should be noted that the employment impact is adjusted for the increase in the industrial wage index (2.1% from July 2005 to July 2006, according to Statistics Canada, Table 281-0039).

3. Data

Criteria

The study requires data for two main reasons: to describe marine activities in sufficient detail to allow the reader to develop a clear understanding of the nature of the activity and the extent of its economic significance; and, to drive the I-O model in order to generate reliable economic impact estimates. To these ends, the data compiled in the course of the study meet four key criteria:

• Consistency: data allow for comparability across industries and locations, and reflect standard economic theory describing measures of economic activity. This means the same data, methods and tools are used for each industry and in each province or area where impacts are measured. Most of the data originate with Statistics Canada or are consistent with Statistics Canada definitions. Key exceptions are commercial and recreational fisheries data, originating with Fisheries and Oceans Canada; cruise ship tourism data obtained from special studies; public administration, university and ENGO data obtained directly from relevant departments, agencies, universities and environmental organizations in the course of this study. All output values are expressed in current dollar terms.
• Comparability: data are consistent over time so that changes can be observed and measured. Failure in this respect results in uncertainty about whether what is observed is due to real change or merely to definitional differences. This means using standard classifications for industries under consideration. The North American Industrial Classification System (NAICS) is used for this study.
• Accuracy: while each marine activity represents a distinct industry for which direct, indirect and induced impacts can be measured, adjustments have to be made to eliminate double counting when calculating total impacts for certain indicators (e.g., employment). The potential for double counting is great in assessing impacts because of the interdependence of many activities. For example, the output from primary fishing forms a key input for fish processing, i.e., fishing represents an indirect activity of fish processing. Failure to make adjustments in data or results would lead to an overstatement of overall impacts.
• Replicability: data and methods should be one that others can repeat so that the analysis can be carried out periodically allowing time series measures of the ocean economy. This means that data, methods and models used should be readily accessible for future analyses. For this reason, data definitions, sources and methods used to derive data, are carefully explained in the text, tables and appendices, and any assumptions made explicit.

Availability and limitations

The results fairly represent the nature and extent of marine activities in Canada and each of its regions, though some data limitations exist (particularly with respect to the Arctic). With the exception of a general two-year lag in finalizing GDP estimates, the data strengths and weaknesses tend to be industry-specific and are discussed in the following chapter. In brief:

• Fishing: annual data on industry output (value of landings) are reported by DFO and Statistics Canada. Statistics Canada also reports GDP. Given the number of enterprises in the industry, data confidentiality is not an issue either at the national or provincial levels.
• Aquaculture: annual data on industry output (value of landings) are reported by DFO. Statistics Canada reports GDP. Data confidentiality is not an issue at the national level, though can be for some species in some years at the provincial level.
• Fish processing: annual data on industry output (value of production) and GDP are available from Statistics Canada. Given the number of enterprises in the industry, data confidentiality is generally not an issue either at the national or provincial levels.
• Offshore oil & gas: data on the value of output and GDP are confidential at the provincial level because of the limited number of enterprises in the industry. Data on the offshore segment of the oil & gas industry are not distinguishable from overall industry data at the national level. Estimates of the value of output are derived from crude oil and natural gas prices applied to production data (quantities) obtained from regulatory agencies (federal-provincial boards in Newfoundland and Labrador and Nova Scotia). See Appendix A.
• Support services for oil & gas: data on the value of output and GDP are confidential at the provincial level because of the limited number of enterprises in the industry. Data on the offshore segment of the support services industry are not distinguishable from overall industry data at the national level. Estimates of the value of output (expenditure data) are obtained from regulatory agencies (federal-provincial boards in Newfoundland and Labrador and Nova Scotia).
• Marine transportation: data on the value of output and GDP are available from published sources at the national level and at the provincial level, but not for all years due to confidentiality. Value of output at the provincial level can be obtained from Statistics Canada by special request.
• Support services for water transportation: data are included in a broad category "Support services for transportation" and not reported for the marine component. Estimation is necessary to determine value of output and impacts. See Appendix B.
• Tourism: surveys on activity levels (days) and expenditures by province are conducted by Statistics Canada, Fisheries and Oceans Canada and an industry association for the three main tourism sectors: coastal tourism, recreational fishing and cruise ship travel. Data from these surveys are readily available for recreational fishing and cruising, but require a special tabulation for coastal tourism and recreation. See Appendix C.
• Marine construction: this activity applies to two sectors, oil & gas and ports & harbours. Statistics Canada does not report output data for marine construction because this activity is captured within a broader construction category. Nonetheless, data are available from various sources including regulatory agencies for oil & gas, Fisheries and Oceans Canada for small craft harbours, port authorities for major port construction, National Defence for naval installations, and provincial agencies for ferry terminal construction. The overall estimate is considered conservative because data on private investment in marine facilities are excluded. See Appendix D.
• Manufacturing: Data on shipbuilding and repair and boat building are produced by Statistics Canada, though confidentiality limits their availability for certain years. Data on the manufacture of equipment for marine uses are not available because this sector is not captured as a distinct industry in NAICS.
• Federal and provincial departments and agencies: data at the national and provincial levels are obtained directly from the departments and agencies, though data for certain federal departments could be made available at the national level only, with regional breakdowns left to the consultant to estimate. Data for some departments require adjustment to avoid double counting. This is a problem mainly with transportation, where both Transport Canada and several provinces subsidize ferry services. See Appendix E.
• Universities and ENGOs: provincial-level data are obtained through surveys from universities and organizations.