Polar economics: expectations and real economic futures

Mixed economies of the Arctic are commonly described by their unique economic structures and the many associated challenges – e.g. small size, remote locality and high costs, – their significant resource constraints, market volatility and the many and diverse interests of different actors and stakeholders. In more recent times, the increase and spread of modern technology and communication networks has meant that many areas of the Arctic are successfully overcoming some of these well-known challenges as now work and business with world markets and external environments can be conducted long distance from even the most remote localities. With these and other economic changes, including increased economic diversification in many parts of the North, we are witnessing the new economic reality of a changing Arctic, including the region working its way to becoming well established on the global economic scene. It is today a story about the world getting smaller, and with this the Arctic becoming more integrated and connected across borders and regions – bringing along a mixed bag of costs and benefits.

This special issue of The Polar Journal is about this new reality; the changes, development trends, risks and uncertainty, and future expectations, and some of the scientific contributions we are making as an economics and social science discipline in this regard.¹ Today, the pattern of change differs from the past in terms of rate and magnitude, as well as the complexity of multiple changes and stressors along different scales and axes. Change has become a key buzz word in the Arctic discourse. This raises questions of whether the observed and predicted current and future pathways have brought innovative economic ideas, new ways of thinking in and of the North, or whether we are using old tools to solve new challenges. In light of the altered socio-economic landscape in the Arctic, in this special issue on Polar Economics, we take a closer look at why and how the Arctic economy is transforming, the main drivers – global and regional – and the impacts, threats and opportunities, to Arctic economies and sustainability.²

The new Arctic is described by diverse impacts of globalisation pressures, stepped up migration streams, urbanisation and population concentration, and the continued trend of economic integration. This is placing the Arctic increasingly alongside other regions in a global context, which also means a need to build capacity and to address resource gaps at all levels. Heightened economic expectations linked in particular to climate change, altered accessibility to important and strategic minerals, and a growing demand for northern resources, have been characterising more recent times. Yet, at the same time, and counterpoised to this, non-resource extractive industries – such as tourism and arts and crafts – are expanding in importance, signalling a trend towards economic diversification at the local and regional scale, and with this a growing potential for more income and economic benefits remaining in local communities.³

This special issue offers a contribution to the in-depth analysis of the northern economy, and explores further some of the many unresolved questions. It deals with questions of economic change and development in the Arctic in an era of multiple challenges, and represents in many ways an exploratory exercise and important contribution on the emerging new Arctic economic reality. The general questions addressed are a reflection of the big issues for the Arctic today: what is needed to achieve sustainable Arctic futures and more equality, including better living conditions for Arctic residents and local communities?

With the mounting interest in the Arctic and its resources, the time seems beyond ripe to put a closer and more critical focus on economy – market and non-market – including evaluating where we are at. Is our science keeping up with the speed of change and the demand for new knowledge? Since the lead up to the International Polar Year almost a decade ago, we have seen a significant increase in the volume of literature on economic issues in the Arctic; and we have also witnessed a burgeoning attention to polar issues in general – much of which has been linked to climate change and globalisation trends. Still, there are many gaps that need to be filled, and this issue attempts to make a contribution in this regard.⁴

Changes in the Arctic are by now fairly well documented.⁵ Much literature has described the complex ways in which the physical, biological and social systems interact and affect local communities and the mixed Arctic economies. In relation to climate, the observed changes to sea ice, permafrost and increased coastal erosion affect economies at various levels and scales, and present challenges to infrastructure, transportation and Arctic residents’ participation in traditional activities.⁶ At the same time, much remains the same even when change is occurring on many fronts, including climate. Economic outcomes and the industrial structure, conduct and performance will no doubt continue to be affected by small size, remoteness of scattered towns and villages, high costs of production, long distances to markets and high levels of economic uncertainty that characterise the Arctic. These thematic areas of change and persistence tend to call for our interdisciplinary focus and collaboration, and some of the articles in this issue bear witness to this.

Ten years ago, the discourse was mainly centred around the level and flow of economic dependency, the lack of diversification in the formal economy, the basic economic pillars, the inequality between economic groups and the continued importance of the informal economy – whether addressing frontier or more mature economic settings.⁷ Today our discussions centre increasingly around issues of globalisation, climate change, gaps that need to be filled for local communities to move forward to sustainability and a greater level of human well-being, the role and presence of extractive industries, community viability and economic adaptation, and the importance of alternative energy – while also emphasising the vast complexities and the multiple challenges, many of which seem to be converging.⁸

Although significant advances have been made, Arctic economies remain to some extent relatively unexplored in their economic detail and theoretical construction. Part of this may be explained by the fact that historically the research on local economic activity tended to be conducted in particular by other social science disciplines – most likely because of the traditional activities and non-market characteristics of local and predominantly indigenous communities. This created invaluable contributions to the field of Arctic social science. In more contemporary times, the tradition has been changing, albeit slowly, with the field capturing a growing interest from the economics discipline itself, in and outside of the Arctic. Economists have tended to be specialised in economies and models outside the Arctic where their concepts and theoretical training could be more readily applied or further developed and where data were more ample for testing. The current status, and perhaps a reflection of a relatively slow start, is that there is an urgent need for more analytical research on the Arctic economy firmly anchored in economic theory, with more attention to theoretical modelling and empirical testing. The diversity of papers in the current issue reflects that the scope of Arctic economics as a field is broadening, and that economists are focusing more now than in the recent past on discussing and presenting models, theoretical approaches appropriate to the special Arctic context and frameworks that look ahead to solving challenges relating to the economic viability of the North. This special issue includes papers from economists specialised in resource economics, environmental economics, game theoretical approaches, etc. It would seem that not only is the Arctic economy undergoing change but so is the field of economic study of the Arctic.

In many ways, there is a need for a paradigm shift in how we think about the economics of the polar regions, including our thinking in terms of transformation – which is appropriately reflected in some of the contributions in this issue. In the context of our heightened focus on sustainability, and climate change and environmental challenges related to increased human activities, there is a need to further explore new ways of thinking including new paradigms such as green perspectives to be incorporated into contemporary models if we want to think more broadly about sustainable futures and transformative change. As a scientific community we know of the importance of multiple perspectives, the complexity of challenges, the need to integrate different systems in order to understand the Arctic and to move forward with more sustainable solutions. Green economy perspectives contribute with their emphasis on the need to look beyond economic factors to also integrate social and environmental components while emphasising long-term sustainable well-being rather than short-term monetary benefits.⁹ Economic models may address these issues by looking at structural changes in how we consume, produce and trade; by taking a closer look at ways forward to empower stakeholders that may otherwise be forgotten, including the informal sector; filling various resource gaps, including educational gaps; as well as focusing on the economic diversification in non-resource extractive industries and smaller enterprises – aspects that are very much at the forefront of our discussions in the social sciences in general.

When we take a closer look at change, we realise that many trends and challenges are intersecting, such as the economic, environmental and climate challenges – and in turn creating a new level of risk and uncertainty. Change and flexibility remain key words in our discussions and conceptualisations about the future of the Arctic economy. Important questions centre on how to create an economy that deals effectively with large surges of risk and certainty and persistent market volatility. Questions we may want to consider include whether we have a realistic framework for studying this and for making useful recommendations.

Arctic economic performance remains a tricky area of study. Problems with measures of economic performance in the Arctic complicate the task of assessing the contribution to local areas of engaging in resource development, and may mask the size of the actual benefits of resource extraction activities.¹⁰ Recent data suggest that less income is leaving the region than a decade ago – hence also suggesting a beginning reversal of the long-term trends of economic dependence, and a stepped up economic diversification and the expansion of non-extractive industry.¹¹ This poses questions of how this positive trend may be reinforced. How do we fill or overcome obstacles of resource gaps locally? What role do new institutional arrangements play? How has the economic balance of power been reshuffled with this emerging trend? Who are the new actors? What is their role, their local or regional presence and their economic leverage?

To frame the context further for our special issue, it is useful to briefly note a few of the key observed and emerging trends of relevance to the Arctic economy: economic globalisation has been a reality for a long time, and with this has come new values, ideas, concepts, decision-making changes, altered taste and lifestyle preferences, etc., as well as changes in migration streams at different scales, including the concentration of population in towns and urban areas and with this also greater consumer bases in some places, while depopulation and closures may characterise others; but also the growing awareness of the Arctic, closely linked to expectations of opportunities in resource development– albeit they may be overly optimistic. In fact, while there is considerable hype about resource development, it does not mean that we should assume that resource extraction will increase per se.¹² Natural resource development is contingent on expected profitability, and with the volatility of markets, prices and politics, the long-term profitability may be less likely and ventures more risky. In addition to these developments, there are trends towards greater marketability of the Arctic, including Arctic identities becoming more of an asset; as well as the growth of connections and linkages with the global arena, and therefore also urgent needs to build capacity.¹³ The way ahead is determined in part by shifts and transformations in institutional and governance structures at various scales, and increased indigenous political and economic empowerment as often emphasised. These developments have also brought multiple economic challenges, including meeting the new and heightened demand for human and financial resources in the Arctic. The literature also point to trends of persistent inequality in many parts of the Arctic, and continued importance of the informal economy, some aspects of which are addressed further in this special issue.¹⁴

Attention to emerging global trends is likewise important due to the broadening connectivity between the Arctic and the global level. Trends in this realm include the world becoming smaller by virtue of its greater integration, the general ageing trend with implications for health, consumer base, economic burden and dependency ratios; urbanisation and population concentration and associated pressures on resources and ecosystem services, infrastructure and the environment; and a generally more connected world with implications for global shopping and information networks. Beyond that, we are likely going to be seeing food prices impacted by climate change, shifting economic powers, rising income levels in emerging and developing markets, along with already collapsing oil prices and declining economic growth in China – all of which are or will be felt by the Arctic economy and society – and therefore demands our further attention.

It is difficult to engage meaningfully in discussions about change and transformation in the Arctic economy without addressing also the impact of climate change in further detail, although there is clearly more to change than climate.¹⁵ Globalisation and climate factors present challenges as widely documented in the literature.¹⁶ Building a more sustainable and viable Arctic future depends on our ability to develop creative solutions that will help contribute to climate adaptation and mitigation. Climate change in the Arctic involves complex interactions – bringing us more into the frame of interdisciplinary thinking. Common constraints to implementation of adaptation exist. Some of these constraints are similar to those creating broadscale challenges for economic development in the region, such as: limited human and fiscal capacity and resources; differences in values and risk perception; lack of appropriate institutional arrangements adjusted to changing contexts; limited coordination of governance; and lack of appropriate tools and systems for effective monitoring and data collection.¹⁷

As widely documented, climate change introduces an element of risk and uncertainty and potential high costs in key economic sectors. As impacts of climate change can be expected to slow down economic growth, this provides climate change with an important place in our economic models, scenario building and discourse on Arctic economic futures. We need to know more about risk management in the Arctic – risk in resource development and risks associated with climate change. Future risks are affected by the magnitude and rate of climate change and by socio-economic choices. Due to a host of diverse backgrounds and differences in values and goals, people and societies understandably perceive or rank risk differently. As often emphasised, the Arctic environment is characterised by a broad range of stakeholders, differences in attitudes towards risk, which in turn has implications for potentially growing conflicts of interest over resource use.¹⁸ The literature has shown that as a society we are not well prepared to tackle risks related to a changing climate, and that we could realise economic returns to investment in better preparedness. These issues are briefly touched upon in some of the articles in terms of theoretical models to address change.

Still, while the widespread socio-economic impacts of climate change are a reality in the Arctic, the fact remains that other changes in the human and economic systems, such as demographic changes, income, technology, relative prices, lifestyle, regulation and governance presumably will continue to be large relative to the impacts of a changing climate.

While papers in this special issue are titled towards considering challenges facing the Arctic economy (e.g. environmental impacts of resource extraction, climate change, the lack of economic diversification, economic inequality, constraints on adaptation and market failures), it is however useful to remind ourselves that there are also many important success and feel-good stories happening across the Arctic, and these can be used e.g. for identifying best practices for moving forward. They include for example changes in institutional arrangements that have contributed to local empowerment and increased leverage in negotiations on issues of resource extraction and local benefits; the increase in local control and ownership which is providing important leverage in the relationship between local and external markets; the observed increase in non-resource extractive businesses, such as tourism, arts and crafts; documented pilots with Arctic energy,¹⁹ as a way of addressing climate change and the high cost of imported energy; and new technology that makes it possible to work and study from even the most remote corners of the North. Some of these thematic areas are discussed in the contributions to this special issue.²⁰

And finally, many gaps remain in our knowledge: there is a need for more knowledge on global linkages and new Arctic actors. We need to work towards a more comprehensive understanding of the socio-economic linkages between the Arctic and the rest of the world. Also, data limitations continue to present challenges in our work. We need better data quality and data access to be able to test our hypotheses about the economic future. Also, there continues to be fundamental issues such as how do we measure economic progress? What adjustments should be made to the gross regional product measure for it to more accurately reflect economic activity (by incorporating important components such as the informal economy, environmental impacts, the outflow of profits, rents and other earnings that do not remain in the Arctic)? Work in this regard was commenced for instance through the work on ASI,²⁰ but much more needs to be done to fill the gaps; and important adjustments are needed to account for bio-physical changes. And finally, as for the informal sector, and as emphasised by Huskey et al.,²¹ while the introduction of a variety of new institutional arrangements represents one of the most significant changes in the Northern economy, gaps remain in our knowledge on what types of institutions work best to improve economic well-being of northern residents, and importantly, we need to know more about how these informal institutions in the Arctic may complement formal institutions in resource management to achieve optimal outcomes.

With these identified gaps and initial reflections in mind, we now turn to the papers in this special issue. In the following, nine substantive papers contribute to expanding our knowledge on the important issues related to the present and future Arctic economy. None of the papers address the Antarctic although there was an attempt made to solicit for such papers. While there are a number of smaller economic activities in the Antarctic, such as tourism, fisheries and semi-informal economy on the field stations, the primary focus of polar economics is understandably on the Arctic, and so are the written contributions to this issue of The Polar Journal.

In this issue

With a focus on resource development and sustainability in Northern regions and communities, Lee Huskey and Chris Southcott examine in their paper “That’s where my money goes: resource production and financial flows in the Yukon economy” the staple theory as a useful alternative to the resource curse approach. They make an application to the case of the recent resource boom in Yukon, Canada, and present a convincing argument for the relevance of the staples approach in examining how communities can benefit from the spending and revenue associated with natural resource extraction, and in turn, what the potential drawbacks are to using the resource curse hypothesis and perspective. The article outlines the stories of the resource curse and the staples theory, respectively, followed by an analysis of empirical evidence from the case of the Yukon, and concludes with evidence that shows how economic development can be increased by considering factors that strengthen fiscal, backward, and final demand linkages.

In the second article on “Arctic games: an analytical framework for identifying options for sustainable natural resource governance”, Scott Cole et al. present an interesting framework and fresh new approach to analysing northern economies which in some ways can be seen as a useful complement to the work of Huskey and Southcott on the staples approach. Cole et al. present an analytical framework that stands out as an alternative to existing disciplinary approaches to help assess complex sustainability challenges. The article provides a theoretical framework for Arctic decision-making in conditions of multiple actors and stakeholders, diverse interests, different levels of decision-making and multiple stresses of Arctic change. The framework includes a game theoretical approach as a novel contribution, in addition to environmental economics, welfare economics and environmental governance. The focus of this paper is on understanding actors’ incentives and strategic behaviour, and how these influence outcomes. An application of the game theoretical framework is made to the case of oil development in Lofoten, Norway.

The third article by Andrey Petrov on “Exploring the Arctic’s ‘other economies:’ knowledge, creativity and the new frontier” is a useful complement to the works of both Huskey and Southcott, and Cole et al. It offers a platform for thinking beyond extractive industry – taking us beyond resource dependency and the usual basic pillars of the Arctic economy – large-scale resource extraction and so on. Petrov makes a convincing argument for looking beyond these traditional pillars of the Northern economy, as “other” economies (e.g. knowledge-based industries) are growing in importance. As argued by Petrov, these sectors demand a closer examination as they may hold the key for future sustainability. The approach helps draw a more multifaceted picture of the Arctic economy. Petrov presents a series of interesting case studies that illuminate various aspects of the “other” economies, and makes the argument that as they mature, economic dependency is expected to diminish leading to a more sustainable model of development. Together with the two previous articles, this paper contributes to showing the diversity and ongoing transformation of the northern economy.

In the journal’s fourth article on the “Inequality and social processes in Inuit Nunangat”, Sébastian Lévesque and Gérard Duhaime examine the existing inequality and social processes in Inuit Nunangat. In contrast to other articles that have focused on relatively newer perspectives for understanding the outcome of the northern economy, this article examines the current outcome and persistent socio-economic challenges associated with the application and use of modernisation theory in the Canadian Arctic. As emphasised by the authors, modernisation theory has oriented programmes of development in many regions of the North, including Canada. To demonstrate their argument, they present an interesting case study where they use empirical analysis to analyse the distribution of resources between the Inuit population and the non-Aboriginal populations of Inuit Nunangat. The focus of the paper is on the mechanisms and processes – tied to the use of modernisation theory – that have led to the differentiated access to socially coveted resources and inequality between the region’s Inuit and non-Aboriginal populations in the Canadian North.

Next, and continuing on with the theme of indigenous livelihoods, in their paper on the “Pasture access and adaptive capacity in reindeer herding districts in Nordland, Northern Norway”, Camilla Risvoll and Grete Hovelsrud explore the multifaceted pressures facing local reindeer herders. They present a case study and bottom-up approach – rich on primary data collection, using exposure sensitivities, adaptation and adaptive capacity as conceptual tools – of the adaptive capacity in the reindeer districts in Nordland, Norway. In their study, empirical evidence from three reindeer herding districts show the connections between socio-economic and environmental exposuresensitivities. Key findings point to the importance of resource access and livelihood flexibility in resilience to changes in socio-ecological systems. The article contributes in important ways to knowledge on enhancing resilience of local socio-economic systems.

The next paper by Albina Pashkevich, Olof Stjernström and Linda Lundmark on “Nature-based tourism, conservation and institutional governance: a case study from the Russian Arctic” is an interesting complement to the previous papers. Pashkevich et al. show that nature-based tourism plays a complementary role in contributing to regional development in the Russian Arctic. Based on case studies in the territories of the north-western part of the Russian Arctic, they investigate the institutional arrangements connected to the protection of natural resources in developing nature-based tourism; and explore the capability to establish planning schemes. The paper examines the challenges presented by the existing institutional arrangements at the regional and local level, with a focus on Arkangelsk Oblast and the Nenets Autonomous Okrug. These case studies effectively help illustrate how the development of nature-based tourism may be promoted or constrained by the different methods of nature conservation. The authors argue that the current system of institutional governance limits the possibilities to increase the economic impact of nature-based tourism in the Russian Arctic, and as such this paper provides further evidence on the importance of institutional arrangements to achieve progress in development in the Arctic.

The paper by Ivar Jonsson is somewhat different from the other papers in part because the focus is on Iceland – one of the more mature regions of the Arctic – and the perspective is a mix of economics and political science, with a look at the Icelandic economic crisis of 2008 and the decay of the political party system. In his paper on “Economic crisis and real critical junctures – on the decay of the political party system of Iceland”, Jonsson presents a detailed account of the history of the Icelandic political party system. A central argument is that the regime in Iceland may generate another financial crisis in the future due to both structural strains and high levels of oligopoly, as well as the persistence of a neoliberalist societal regime. The paper reminds us that the study of the Northern economy also includes highly developed regions that may face challenges that are both similar but also of a very different nature. The author presents an analysis of the long-term development of the Icelandic party system in terms of a set of theories in comparative politics, and the impact of economic development and the 2008 financial crisis, and he elaborates on the development of the political party systems in terms of real critical junctures that the economic contexts of the financial crisis of 2008 contributed to generating.

Moving from case studies to the more general and circumpolar scope, in the eighth paper, Brooks A. Kaiser, Linda M. Fernandez and Niels Vestergaard explore in their contribution on “The Future of the Marine Arctic: Environmental and Resource Economic Development Issues” the potential market failures associated with industries in the Arctic – shipping, fishing, oil and gas exploration and tourism – with the objective to highlight the type of market failures that should be addressed to achieve economic sustainability in the Arctic. This is a useful overview that provides a reflection on the range of challenges, and presents us with examples of tools for addressing and managing them in inclusive and sustainable ways. One of the central arguments made is that in order to increase the possibilities for sustainable, welfare-improving development in the Arctic, there is a need for governance of Arctic resources that incorporates bio-economic and strategic considerations. The article contributes with a useful overview of an Arctic setting composed of key sectors, and asks the increasingly important question of how we govern the Arctic given the presence of multiple market failures and a myriad of pressures and growing challenges.

The final paper on “Japan’s admission to the Arctic Council and Commitment to the rights of its Indigenous Ainu People” is substantially different from any of the other contributions in this special issue, and only indirectly relates to the overall theme of Polar Economics. In contrast to the other papers, which all present research and theoretical perspectives on issues and challenges of Arctic economies, the paper by Kamrul Hossain and Hiroshi Maruyama introduces a legal perspective on the admission of Japan to the Arctic Council as an observer and its commitment to its own indigenous peoples. This paper – anchored in legal studies – is of relevance here though in that Japan’s interest in the Arctic is growing for economic reasons. Hossain and Mruyama explore the issues that need to be addressed in regard to Japan’s observer status in the Arctic Council, and specifically, the paper analyses Japan’s commitment to the rights of its Indigenous Ainu People. Arctic sustainability is contingent on the commitment to indigenous peoples, and it is of interest what the Japanese perspective is in this regard.

Joan Nymand Larsen
Stefansson Arctic Institute and University of Akureyri, Iceland

Acknowledgements

I would like to extend my sincere thanks to the many authors for their papers, their great enthusiasm and dedication to this special issue on Polar Economics, and to all the many peer reviewers who provided valuable feedback and thoughtful comments that helped improve this volume. I would also like to thank Anne-Marie Brady and the team at Taylor and Francis for their guidance, advice, and dedicated support.

Notes

¹ Larsen and Huskey, “The Arctic Economy in a Global Context.”

² E.g. AHDR, Arctic Human Development Report II; Evengaard et al., The New Arctic; Larsen and Huskey, “The Arctic Economy in a Global Context”; Huskey, “Globalization and the Economies of the North”; Heininen and Southcott, Globalization and the Circumpolar North.

³ Larsen and Fondahl, “Summary of Major Findings,” 21–22; Rasmussen, Megatrends.

⁴ E.g. Fondahl and Larsen, “Introduction,” 33.

⁵ E.g. AHDR, Arctic Human Development Report II; Rasmussen, Megatrends; Evengaard et al., The New Arctic; IPCC, Climate Change 2014; Arctic Council, Arctic Resilience Interim Report 2013; ASI, Arctic Social Indicators: Implementation.

⁶ E.g. AMAP, Snow, Water, Ice; Forbes, State of the Arctic Coast 2010; IPCC, Climate Change 2014; Larsen et al., “Polar Regions”; Prowse et al., “Implications of Climate Change”; Arctic Council, Arctic Resilience Interim Report 2013; Clement et al., “Managing for the Future”; Olsen et al., “Sustainable Business Development.”

⁷ Duhaime, “Economic Systems”; AHDR, Arctic Human Development Report; Glomsrød et al., “Arctic Economies within the Arctic Nations.”

⁸ E.g. AHDR, Arctic Human Development Report II; Huskey et al., “Economic Systems,” 151–180; Southcott, “Social Economy and Economic Development.”

⁹ E.g. GEC, Submission to UNCSD; Rio+20, Policy Brief.

¹⁰ Duhaime, “Economic Systems.”

¹¹ Huskey et al., “Economic Systems,” 175–178; Larsen and Huskey, “The Arctic Economy in a Global Context.”

¹² For more detail on these trends, see e.g. AHDR, Arctic Human Development Report II.

¹³ Ibid.

¹⁴ E.g. ASI, Arctic Social Indicators; Arctic Social Indicators: Implementation.

¹⁵ E.g. IPCC, Climate Change 2014; AMAP, Snow, Water, Ice.

¹⁶ E.g. Keskitalo and Southcott, “Globalization in the Arctic,” 397–417; IPCC, Climate Change 2014.

¹⁷ E.g. Larsen et al., “Polar Regions”; AMAP, Snow, Water, Ice; Forbes, State of the Arctic Coast 2010; Prowse et al., “Implications of Climate Change.”

¹⁸ E.g. Arctic Resource Development, Risks and Responsible Development; IPCC, Climate Change 2014.

¹⁹ E.g. The Circle, “Renewable Energy in the Arctic”; Fondahl and Larsen, “Introduction,” 33.

²⁰ AHDR, 2014.

²⁰ ASI, Arctic Social Indicators; Arctic Social Indicators: Implementation.

²¹ Huskey et al., “Economic Systems,” 178.