The story of two Nova Scotia paper mills shows stubbornness and rebirth in one case, despair and defeat — at least for now — in the other.

The NewPage paper mill in Cape Breton dominated the economy of Port Hawkesbury and the surrounding area. Once, it employed almost 1,000 people, with hundreds of other jobs indirectly dependent on its existence. NewPage closed in September 2011 and was granted court protection from its creditors, creating mass unemployment and leaving many small, local businesses holding the bag. The mill was put up for sale by the court-appointed monitor, but no one was optimistic about the prospects.

Then, along came Vancouver-based Pacific West Commercial Corp., a savvy mill operator. It negotiated major union concessions, grants and tax breaks from Nova Scotia, and reduced electrical rates. Secured creditors owed $3 billion will get only $31 million; unsecured creditors will split about $2 million. These arrangements were not reached without controversy, but they were reached. The Port Hawkesbury mill is expected to open again in October.

Resolute Forest Products Inc. (formerly Abitibi Bowater Inc.) closed its Brooklyn paper mill in June. The Brooklyn mill was Queens County’s biggest employer by far, directly employing 300, with many others indirectly dependent on it for work. It is considered highly unlikely that anyone will buy and revive this plant, although there is some interest in Resolute’s extensive woodlands and the company’s co-generation facility.

Meanwhile, the Queens County population continues to dwindle as increasing numbers of the newly unemployed take work out West. The local and provincial governments cluck sympathetically and create committees to study the situation; but, so far, it has all been ineffectual. NewPage may have risen from the ashes, but the Queens County mill seems as dead as a dodo.

These stories illustrate the underlying problem of scale, identified in a recent paper written by Marq de Villiers, a wellknown author who lives on Nova Scotia’s South Shore. (The paper was submitted to various committees trying to develop an economic strategy for Queens County.) Writes de Villiers: “The first basic principle is that Queens should avoid the trap of scale _ a single large employer whose demise is automatically devastating. A more resilient economy is one whose employment is more diffuse and less prone to catastrophic failure.” He uses the metaphor of a Smart-Grid electrical generation and distribution system: “A ‘distributed’ or decentralized grid, in which power is generated using a series of regional or smaller generating stations instead of a few massive plants, is better able to withstand shocks, whether they be technical, weather-related or human-caused.”

Government seems incapable of grasping the problem of scale, let alone addressing it. If a major employer fails, the official response normally is to try to revive it or replace it, no matter what the cost. This is a mistake. As de Villiers writes: “A subsidy of $25,000,000 to a large employer _ is more vulnerable to failure than $25,000,000 divided between 100 carefully targeted programs.”

Or, as economist E.F. Schumacher put it 40 years ago: “Small is beautiful.”

© 2012 Investment Executive. All rights reserved.