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Does Canada have a bad case of "Dutch Disease" AKA "Resource Curse"? And, if so, what can be done about it?

JKR
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Joined: Jan 15 2005

Dalton McGuinty has come out and said what a lot of people are thinking, that the oil industry is hurting Canada's overall economy.

Oil Sands: Dalton McGuinty Dismisses Alberta Premier's Call To Defend Development

Quote:
Mr. McGuinty rejected that assertion, saying the harm caused by the high Canadian dollar relative to the U.S. greenback far outweighs any spin-off benefits Ontario might derive from Alberta’s oil and gas sector. A study by the Organization for Economic Cooperation and Development supports his stance. It says Canada has entered into a form of the dreaded “Dutch disease,” whereby the increase in exploitation of natural resources is leading to a decline in manufacturing.

Mr. McGuinty said the Canadian dollar, which has soared to over $1 from just 67 cents in 2003, is making goods produced in Ontario more expensive for buyers outside the country. The “petro dollar,” he said, has been driven by global demand for oil and gas from Western Canada.

“That has knocked the wind out of Ontario exporters and manufacturing in particular,” Mr. McGuinty told reporters. “So if I had my preferences as to whether we had a rapidly growing oil and gas sector in the west or a lower dollar, I’ll tell you where I stand: with the lower dollar.”

Canada's bad case of "Dutch Disease" AKA "Resource Curse" is hurting Canada and sooner or later our politicians are going to have to deal with it.

If we had sane government in either Ottawa or Alberta, huge amounts of revenue from the oil industry would be diverted into a sovereign wealth fund denominated in foreign currency to ensure that this non-renewable resource benefits Canadians from all regions over the long term.

And if we had a sane government in Ottawa, our equalization program would be treating provincial revenues from oil royalties that don't go into a sovereign wealth fund the same as other sources of provincial income.


Comments

autoworker
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One of the problems with Canada's increased dependence on its resource sector is that, while resource companies have invested in technologies that require less labour intensity, manufacturing depended mostly on a lower dollar to compensate for gaps in productivity, due to a reluctance to invest in advanced processes. One would think that a high dollar would, conversely, make capitization of plant and equipment more favourable, given that machine tools and automated process equipment are mostly sourced offshore. It seems that, rather than modernizing their facilities to increase productivity, factory owners prefer to squeeze costs out of their workers, as in the case of Electro-Motive, et al. With resource sector expansion exacerbating the problem in manufacturing, without creating enough jobs to replace the one's displaced, workers are left wondering why labour mobility was not negotiated within the framework of trade agreements.


socialdemocrati...
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Joined: Jan 10 2012

It's politics.

Newfoundland, Saskatchewan, and Alberta are all benefiting massively from the resource wealth. The slightest hint of slowing that down means writing off those provinces.

In theory, there should be enough enough votes in Quebec and Ontario to trump that. But Ontario is by far the most diverse in demographics and viewpoints, meaning that it's nearly impossible for any party to sweep it (without serious vote splitting going on).

The Conservatives positionining on this issue allows them to sweep Alberta, Saskatchewan and Newfoundland, and their social conservativism gets them a lot of seatss in rural regions in Manitoba, BC, and Ontario.

This is a critical issue for me. As much as the tar sands harm the environment, I'm far more worried about what it does on the economy.

But with the center of political power shifting West, I'm not sure how the country gets back on track.


jerrym
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Joined: May 30 2009

The high dollar created primarily by the oil sands and world prices for oil is devastating the Ontario and to a lesser extent the Quebec economies where more than 60% of Canadians live. We only need to look at the Midwest of the US to see how this has played a major role in destroying its middle class and destroying these regional economies. I live in BC and can remember the repeated boom and bust cycles of the 80s and 90s that are much more frequent and severe in resource-based economies. Alberta also went through a bust in late 80s and early 90s as oil prices dropped dramatically. Furthermore, there is not enough population in the West to support a depressed Central Canadian economy. I fear that when the next resource bust occurs and the dollar drops in value their won't be much of a Central Canadian manufacturing sector left to save or to counteract this downturn. Harper's Albertan firewall and the aggressive development of the oil sands at all costs will leave us poorer both economically and environmentally.

 

 

 


Fidel
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Joined: Apr 29 2004

Our colonial administrative governments just don't get it. They want to maintain a backward old world economy based on fossil fuels and exporting raw materials to be value-added in other countries. They've been on the take for a long time in Ottawa and Calgary. The rest of the country pays for a bit of inflation leaking out of Alberta. 

Flaherty says Canada may set up wealth fund 2008

Political conservatives generally choose to do nothing, and the result is nothing. They talk and do nothing as a general rule.


Buddy Kat
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Joined: Sep 21 2006

Fidel wrote:

Our colonial administrative governments just don't get it. They want to maintain a backward old world economy based on fossil fuels and exporting raw materials to be value-added in other countries. They've been on the take for a long time in Ottawa and Calgary. The rest of the country pays for a bit of inflation leaking out of Alberta. 

Flaherty says Canada may set up wealth fund 2008

Political conservatives generally choose to do nothing, and the result is nothing. They talk and do nothing as a general rule.

Yep the great exporter of all our raw materials ..value is added and sold back ..the same story that has been going on for decades and decades and no matter how much people complain there is always a gimmick like FREE TRADE that ruins it all... it will have to be incidents like innocent people being rounded up and placed in cages before a government will actually budge and fight for anyone that wants to add value ....and that is because the publicity will kill them at the polls ....-See how important a vote is -...the only power we have, now taken away by the conservative party of canada...they sell us out all the time ...you just have to look from the time of the arrow to present day purchases of  problem prone planes to get but a feel for the ignorance and corruption ...

 

 

http://www.youtube.com/watch?v=J-QvXax88J8

http://www.youtube.com/watch?v=q0eQgUpkJ1Q

http://www.youtube.com/watch?v=Ns8LD5Q8ecc


JKR
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Buddy Kat wrote:
... it will have to be incidents like innocent people being rounded up and placed in cages before a government will actually budge and fight for anyone that wants to add value ....

Hard as it is to believe, people living in cages is already happening.

Cage dogs of Hong Kong: The tragedy of tens of thousands living in 6ft by 2ft rabbit hutches - in a city with more Louis Vuitton shops than Paris - Daily Mail

Quote:

These pictures by British photographer Brian Cassey capture the misery of people - some estimates put the figure as high as 100,000 - who are forced to live in cages measuring just 6ft by 2 1/2ft.


JKR
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Joined: Jan 15 2005

Finally, Canada Goes to School on Dutch Disease - The Tyee

Quote:

Just last November, two Montreal economists writing for the Institute for Research On Public Policy concluded that Canada's manufacturing base was suffering Dutch Disease-like symptoms and that commodity exports driven by oil had been hollowing out the nation’s economy since 2002.

...

The economists called for a national policy that stabilizes the currency and that would also encourage both Alberta and federal governments to save more of their oil wealth in a sovereign fund.

...

An 'entrenched' syndrome

An independent investment firm MacroResearchBoard reached even more damning conclusions last April 2011:

"A severe case of Dutch Disease has dramatically reduced the breadth of the Canadian business sector over the past decade, hollowing out manufactured goods exporters and making the nation increasingly reliant on commodity demand. Canada has often been referred to in jest as the 51st state, due to its historical reliance on the U.S. as a key export market. However, it is becoming more accurate to regard Canada as another Province of China," wrote MRB partner Phillip Colmar

 A 2012 study by European and Canadian economists found that 42 per cent of the appreciation in the Canadian dollar was due to the resource boom and that the Dutch Disease accounted for between "196000 and 220000 jobs lost in the manufacturing sector for Canada."

Another negative aspect of Canada's resource boom is that the provinces outside of Alberta and Saskatchewan are being forced to either weaken their public services or take on too much deficits and debt. Unfortunately, Canada's federal system gives the provinces jurisdiction over the royalties from resource extraction. This causes a situation where provinces find themselves in the impossible situation of having to compete simultaneously with Alberta's low rates of taxation and high levels of public spending. Unfortunately, Canada's equalization system does not adequately mitigate against this situation.

An example of this is playing itself out now in BC where the BC government and BC public school teachers are in a labour war over a new contract. BC teachers are pointing to Alberta where teachers are paid $25,000 more than teachers in BC. The BC government has responded to the teachers by pointing out that with BC's higher tax rates, deficits, and debt, BC is not in a position to come anywhere close to matching Alberta's public salary rates.


JKR
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Joined: Jan 15 2005

As Loonie Soared, Half A Million Jobs Disappeared

Quote:

The loonie's surge has had several triggers, but a big one has been wealth flooding into the country from exports of commodities such as oil, triggering a 22 per cent contraction in the manufacturing sector, with many of those 500,000 lost jobs being shed in Ontario.


JKR
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Joined: Jan 15 2005

As Canadian dollar rose over 10 years, 500,000 factory jobs died

Quote:

"As a result, Canada is no longer a cost-effective location for a host of non-resource-related manufacturing activities. Initially, shutdowns were seen in sectors like apparel and furniture that had earlier hung on in part due to an undervalued exchange rate. More recently, Canada has lagged in attracting or retaining facilities for autos and parts, rail cars, steel mills, and other goods where the competition is now more weighted to U.S. producers."

 


JKR
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Joined: Jan 15 2005

High loonie has taken its toll on auto sector, banks say

Quote:

At peak levels in the early 2000s – as the dollar was hitting its record low – 198,000 Canadians were employed in assembly, auto parts, tool mould and die making and truck body and trailer manufacturing. By the end of November last year, that number had plunged to 131,000, a decline of one-third.

“This is the real live picture when we go from big surpluses to big deficits,” said industry analyst Dennis DesRosiers, president of DesRosiers Automotive Consultants Inc. “These are some of the best jobs in the economy. It is perhaps one of the absolute best examples of what the [high] dollar can do to an industry.”

As the last decade began, Canada was riding high with production of close to 3 million vehicles annually, most of which were exported to the United States. That helped create a surplus. Production fell to 1.5 million vehicles during the recession, and although output has rebounded it’s still almost 1 million vehicles below the peak.

“Canada once punched above its weight in this industry and we’re now punching below our weight,” said Canadian Auto Workers economist Jim Stanford.


JKR
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Joined: Jan 15 2005

Peter Lougheed will go down as a visionary:

 Energy policy anyone?

Quote:

It was in the 2008 report that the OECD first warned that the intense concentration of economic and political activity on the tar sands was actually hurting the Canadian economy overall.

This is due to a well-known phenomenon first experienced in the Netherlands. When the Netherlands discovered rich off-shore natural gas, the boom in production had the effect of increasing the value of the Dutch guilder. It did this to such a degree that the manufacturing sector in the Netherlands was devastated. Exports cost too much. While one part of the economy was doing well—other portions were suffering. This became known as Dutch Disease.

Norway avoided it by taking all the oil and gas revenues out of circulation and putting them in a heritage fund. Despite the fact that Norway patterned its plan on Peter Lougheed’s vision, Ralph Klein cancelled the vision. Alberta now has $14 billion in a heritage fund and is in deficit. Canada came down with Dutch Disease. In fact, some economists estimate that for every job created in the oil sands, another was lost elsewhere in Canada. Well before the September 2008 recession, Canada had lost over 300,000 jobs in manufacturing and nearly 100,000 more in pulp and paper. In order to rebalance the Canadian economy, the OECD recommended a go-slow approach in the tar sands and the implementation of a national carbon tax. The carbon tax, plus cutting subsidies to fossil fuel production (an estimated $2.8 billion/year in Canada), would have the effect of slowing down tar sands development, getting the Canadian dollar unplugged from the price of a barrel of oil, as well as helping reduce greenhouse gas emissions.

Last week, the International Energy Agency made essentially the same observations about Canada’s skewed economic picture and offered the same prescription: slow down tar sands development, kill fossil fuel subsidies and put in place a price for carbon. (See ‘World Energy Outlook, 2010,’ IEA.)

The astonishing thing about this global debate on Canada’s economic health and the extent to which it is undermined by the tar sands is that Canadians do not even know the debate is taking place. We continue to swallow the outrageous whopper that the tar sands are an engine of growth for the whole country.


Sven
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Joined: Jul 22 2005

socialdemocraticmiddle wrote:

But with the center of political power shifting West...

Is that what is happening in Canada?


socialdemocrati...
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Alberta has the money. And Alberta is also growing the fastest, population wise. Between the fundraising and the increase in ridings, there IS a slight shift in gravity westward.


JKR
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Joined: Jan 15 2005

Cohn: Why Ontario won’t apologize to Alberta over the tarsands — sorry, oilsands

Quote:

Alberta owns the resources under its soil. But if this were a truly functional federation, instead of soaking up so much revenue today you’d create a sovereign wealth fund (as other oil-rich countries have) to minimize currency distortions. I don’t hear you talking that up.

We still can’t get Ottawa to bolster our green and clean energy strategy, while it grants generous tax concessions to Alberta’s dirty oilsands. And I’m still waiting for you to back us on that one.


autoworker
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Joined: Dec 21 2008

What is to be done?


socialdemocrati...
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Joined: Jan 10 2012

It's not a new disease. The solution is to take the huge money from oil revenue and invest it in manufacturing infrastructure. (Some investments are safer: high speed rail would be a surefire winner, and I'd venture to say that internet-for-all would be a great investment for the tech sector too.)


Wilf Day
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Joined: Oct 31 2002
socialdemocraticmiddle wrote:

I. . . with the center of political power shifting West, I'm not sure how the country gets back on track.

Media myth. In fact, at the 2015 election Ontario gets 15 more MPs, Alberta gets six, and even Quebec gets three. The centre of power is shifting towards Ontario, because Ontario's historic under-representation is finally being corrected. This is counter-intuitive, since the census shows population shifting west. But it's a fact.


Erik Redburn
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Joined: Feb 26 2004

These are all misdirections.  A high dollar is a mixed blessing, as is a low dollar.  Issue that it misses is one of national soveriegnty over our economy AND our democracy.  And contrary to assumptions held dear on both the right AND left, high oil prices may in fact do more to Encourage oil development than discourage it. Particularly high cost oil sands.  Too much focus by so-called 'free market Greens' on the consumer, and not enouigh on the producers who profit from it and decide on all the 'investment' allocations.  There is Oc no genuine free market in oil, nor is free trade really about trade as is normally assumed.  Those would be more interesting and fruitful discusions IMO. 


theleftyinvestor
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And the trouble with Dutch disease is, the effect on other sectors is a wrecking ball. One extended boom/bust cycle can see previously robust industries destroyed, but those industries never actually come back when the commodity prices have receded. So it serves to put a lot of concentration into the commodities sector.

It has been said that adding value in Canada rather than solely exporting raw commodoties would be helpful - allowing a more diverse set of businesses to benefit from high prices. Consider also that when raw bitumen ships abroad to be refined and sold back to us at a higher price, the cost to acquire the refined product in Canada skyrockets relative to keeping domestic processing capacity and only exporting the product.

One must be cautious with talk of passing oil profits around to bolster other sectors (in the rest of Canada), lest it be branded as the next "National Energy Program".


socialdemocrati...
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Wilf Day wrote:
socialdemocraticmiddle wrote:

I. . . with the center of political power shifting West, I'm not sure how the country gets back on track.

Media myth. In fact, at the 2015 election Ontario gets 15 more MPs, Alberta gets six, and even Quebec gets three. The centre of power is shifting towards Ontario, because Ontario's historic under-representation is finally being corrected. This is counter-intuitive, since the census shows population shifting west. But it's a fact.

That's actually a very good point. I stand corrected.


JKR
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Joined: Jan 15 2005

autoworker wrote:

What is to be done?

We should follow Noway's example. It's ironic that social democratic Norway adopted the advice of former Alberta Conservative Premier Peter Lougheed's while Alberta and Canada failed to.

Norway's Oil Fund Shows the Way for Wealth Funds

Quote:

The Norwegian Oil Fund—recently renamed "the Government Pension Fund-Global"—is often cited as an exemplary sovereign wealth fund (SWF).

 The Government Pension Fund of Norwa- - Wiki

Quote:

The Norwegian Ministry of Finance forecasts that the fund will reach NOK 4,334.3 billion ($717 bn) by the end of 2014 and NOK 6,065.7 billion ($1,003 bn) by the end of 2019.

By 2019 the fund is projected to be worth $200,000 for every single Norwegian, man woman and child!

Norway 'petroleum fund' tops $500bn - Oct 2010 - BBC

Quote:

Norway's oil-fueled state pension fund has grown to a massive 3 trillion Norwegian kroner (£324bn; $513bn), the country's central bank has announced.

The size of the "petroleum fund" means that, unlike other developed countries, Norway has little to worry about when it comes to state pension provision.

The government can spend some 600,000 kroner ($103,000; £65,000) on pension costs for every Norwegian.

This is the kind of thing social democratic government could do for Canada. The NDP should publicize this social democratic success story.


JKR
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Joined: Jan 15 2005

Big Oil, authoritarianism and Canada's petrotyranny - Bruce Livesey - Rabble.ca

Quote:

In 2000, the Canadian environmental activist and scholar John Bacher published a book called Petrotyranny which examined the politics and economics of the oil industry. One of his troubling conclusions was how energy-rich countries tend to be led by undemocratic regimes: indeed, the amount of oil reserves found in countries ruled through non-democratic and unrepresentative means is more than six times the reserves found in more democratically-aligned countries.

...

In Canada, our economy is witnessing a shift in balance of power -- from the manufacturing east to the oil-producing west. And the Tories' strongest base of support is in the west. It seems to be no accident that the stronghold of the most undemocratic right-wing element is Alberta, a province where the Conservatives have been in power since 1971, and where the government derives as much as 40 per cent of its revenue from the oil patch.

Democratic diversity is no longer part of Alberta's political DNA, it seems.


JKR
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Joined: Jan 15 2005

'Dutch Disease': McGuinty Was Right the First Time - The Tyee - Robyn Allan

Quote:

CERI predicts that by 2030 the value of the Canadian dollar will be $1.23 U.S. and by 2044 it will take two U.S. dollars to buy one Canadian dollar -- yes, a 50 cent U.S. dollar. This is because CERI anticipates a significant rise in oil prices over the period, reaching $200 per barrel U.S., in real dollars, by 2044. When the price of oil goes up, so does the value of our petro-dollar.

...

The Harper government has been determined to support the national energy strategy of China which is seeking to lock in energy security for Chinese citizens. As well, it has been blindly championing the needs and desires of national oil companies such as Sinopec, CNOOC and PetroChina, as well as multinational oil corporations, who would like to produce and export raw resources. When they do, it is at the expense of upgrading and refining in Canada, and results in a permanent loss of value-added and jobs, while simultaneously avoiding effective labour and environmental standards.

Without a meaningful national energy strategy that recognizes the economic, social and environmental costs of rapid resource extraction -- and effectively manages the windfall benefits for all Canadians while meeting our energy security needs in eastern Canada -- significant tensions across the country will continue to mount, and certainly be heightened at the interprovincial level.


autoworker
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Joined: Dec 21 2008

Are Albertans real Canadians, or simply wannabe Texans in longjohns?


M. Spector
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Joined: Feb 19 2005

A high dollar only hurts manufacturing to the extent that manufacturers' profits depend on exporting manufactured goods.

Note the two themes: profits and exporting. They are linked.

Take a look around your house: practically everything you see is made outside of Canada, yet these are goods that we all need.

We could have a manufacturing sector that produces goods for our domestic needs. This would reduce our need to import foreign manufactured goods. The reason we don't have manufacturing for domestic consumption is the built-in imperative of growth and expansion of markets that is part of capitalism's DNA. Manufacturers don't make enough profit from looking after the needs of Canadians - they must expand into foreign markets to maintain their profits. 

It's the economic system of production for private profit rather than human need - i.e. capitalism - that makes it impossible for the owners of manufacturing capital to continue producing goods when the Canadian dollar goes up. It's not that we don't need the goods; it just isn't profitable enough to serve only the Canadian market. And profitability trumps need every time.

Canada could manufacture consumer goods for domestic consumption if we could somehow curb the inherent drive to maximize profits. Say, by having publicly-owned industries that were not required to produce shareholder dividends, but rather were controlled and operated by the workers themselves. A high Canadian dollar would become an advantage, allowing the purchase of foreign raw materials not available in Canada as inputs to the production process. Decisions regarding production levels would be governed by concerns of actual domestic needs and environmental soundness, rather than greed and falling rates of profit.

Such an economy would require having a government willing to act contrary to the laws of capitalist accumulation, in the interests of the majority of the population.


socialdemocrati...
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Joined: Jan 10 2012

We're an export economy though. A vast majority of our industry only exists because other countries buy our goods.

I'm as cynical as anyone about globalization and "free trade". But after decades of fostering a dependence on trade, the solution is fairer trade, not an end to trade.

The economy would collapse overnight.


M. Spector
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Joined: Feb 19 2005

Who's talking about an end to trade? We already have an end to trade - in manufactured goods exports.

We're not exporting manufactured goods any more - that's why McGuilty is upset. Other countries are not buying Canadian goods. They are buying Canadian resources - lumber, bitumen, oil, asbestos, iron ore, potash, uranium, water, etc., and paying higher prices for them due to the higher Canadian dollar - because they need those resources and are willing to pay a premium price. "Fairer trade" is not going to compensate for a higher Canadian dollar that makes our manufactured goods more expensive to foreign buyers who can get the same stuff from China and Singapore.

socialdemocraticmiddle wrote:

A vast majority of our industry only exists because other countries buy our goods.

And when they stop buying our manufactured goods because of the high Canadian dollar, that industry shuts down, even though there is a need and a market for those goods in Canada. That's precisely my point.

Why should we assume we are prisoners of the capitalist market system that only allows for production when there are big profits to be made? We don't need to rely on private "enterprise" (a.k.a. theft of surplus value) in order to produce goods that Canadians need, if we have a government that is not dedicated to upholding the profit motive as the guiding principle of human economic activity.


socialdemocrati...
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How are companies supposed to keep functioning if they don't make a profit? I'm not understanding this.

Manufacturing isn't over. It's drastically shrunk. What you're proposing is to shrink it even further, whether you're aware of the export statistics or not. There aren't enough car manufacturers in Canada to buy all the auto parts we export to other countries. There aren't enough people to buy all the appliances and machinery we export to other counrties. There aren't enough people in Canada to buy all those blackberrys, and that's even if you get around the political backlash that would come from telling people they can't have an iPad or an Android because the Canadian government decided to effectively close the border.

 


M. Spector
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socialdemocraticmiddle wrote:

How are companies supposed to keep functioning if they don't make a profit? I'm not understanding this.

Go back and read the second-last paragraph of #26.  But I doubt you'll understand even then.


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