Thomas Mulcair’s claim that the Canadian manufacturing sector has been adversely affected by fallout from the Alberta petro-boom— through a mechanism known to economists as “Dutch disease”—set off a firestorm of strident attacks from Conservative politicians, Western premiers, and the media commentariat.
Mulcair raises a legitimate and empirically defensible—albeit sensitive—public policy issue, which should rightly spur a vigorous policy debate, not continued over-the-top-outbursts.
Dutch disease occurs when a resource boom causes a country’s real exchange rate to rise to the point where other traded products, notably manufactures, become too expensive to export, leading to the decline of those sectors.
In recent weeks, five substantive reports have addressed the issue.
The first study, by Professor Serge Coulombe and two European economists, is about to appear in a prestigious economic journal. It was commissioned by Industry Canada, which chose not to publish it. It is the most rigorous and technically sophisticated study, and the only one that actually quantifies employment loss linked specifically to Dutch disease.
It found that between 33% and 39% of employment losses in the Canadian manufacturing sector related to exchange rate appreciation between 2002 and 2007 were due to Dutch disease—a serious problem.
The second, from the Institute for Research on Public Policy, finds that the Canadian economy is affected by Dutch disease, but it is just a mild case. Industries accounting for 25% of manufacturing output were adversely affected. It proposes several policy measures to make sure the resource blessing does not become a curse.
The third, produced for the Canadian Centre for Policy Alternatives, asserts that the macroeconomic side-effects of the oil-led resource boom are driving an historic shift in the direction of the Canadian economy.
- The Canadian dollar has risen 60% in against the US dollar and is now 25% above its OECD-estimated fair value or purchasing power parity of 81 cents.
- Unprocessed and semi-processed resource exports now account for two- thirds of Canada's total exports. High value-added finished products account for just one-third of exports. By comparison high-value added finished products made up almost 60% of our exports in 1999.
- Some 600,000 manufacturing jobs have disappeared since the turn of the century. By comparison, petroleum extraction jobs have increased by 18,000 since 2000, a miniscule direct offset to the manufacturing job losses.
The main thrust of the CCPA paper is on policy proposals that would maximize the long-run sustainable benefits of resource development, minimize the costs of an overvalued currency, and thereby reduce the increasingly visible symptoms of Dutch disease.
The Pembina Institute study also confirms the existence of Dutch disease, and describes it as a unique strain which the authors dub "oil sands fever.”
The Pembina report warns that rapid oil sands development is generating regional disparities and that existing fiscal equalization policies are inadequate. It asserts that the drive to expand the oil sands, besides causing environmental damage, will worsen regional imbalances, especially with a federal government that is unwilling to take measures to address the problem. It too concludes with proposals to mitigate the negative effects of the oil sands boom.
The final report, from the McDonald-Laurier Institute, while conceding that Dutch disease may exist, says that the spinoff benefits of the Alberta oil boom far outweigh any adverse effects in the rest of Canada. To bolster its argument, it cites among others, a 2011 study by the Calgary-based Canadian Energy Research Institute (CERI).
My read of the CERI study, however, is how little relative benefit 25 years out is projected for the rest of Canada—4% of the total GDP benefit compared to 20% to the US and 76% to Alberta.
In fact, the projected GDP benefits to the United States are five times greater than the benefits to the rest of Canada, and the employment benefits to the US are four times greater.
The state of Illinois gets a bigger jobs benefit than Ontario. Three states–California, Texas and Wisconsin–get a bigger jobs benefit than the combined benefit to all Canadian provinces excluding Alberta.
What is clear to me is that Dutch disease is real, although its magnitude, how it is affecting other provinces and sectors, and what to do about it, is contested.
The continued rapid growth of the oil sands expected in the coming years, left to its own devices, will only aggravate the destructive environmental impacts, and worsen regional and sector imbalances and disparities.
We cannot afford to deny the problem exists, or think that it’s going to fade away anytime soon. How to find long-term sustainable solutions--federally and provincially—should be the focus of debate.
These reports contain numerous policy tools that would help manage and mitigate the fallout from rapidly expanding petro-wealth, and maximize its benefits consistent with Canada’s long-term social, economic, and environmental well-being.
Let’s lower the emotional temperature and begin an adult conversation.
Bruce Campbell is the Executive Director of the Canadian Centre for Policy Alternatives.