Does Canada have a bad case of "Dutch Disease" AKA "Resource Curse"? And, if so, what can be done about it?
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
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.
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.
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.
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.
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=Ns8LD5Q8eccHard 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
Finally, Canada Goes to School on Dutch Disease - The Tyee
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.
As Loonie Soared, Half A Million Jobs Disappeared
As Canadian dollar rose over 10 years, 500,000 factory jobs died
High loonie has taken its toll on auto sector, banks say
Peter Lougheed will go down as a visionary:
Energy policy anyone?
Is that what is happening in Canada?
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.
Cohn: Why Ontario won’t apologize to Alberta over the tarsands — sorry, oilsands
If figures compiled by Russia's Federal Service for State Statistics (FSSS) are to be believed, Putin's quest to create a knowledge-based, high-tech economy has been a dismal failure. Import-export data for the past 12 years shows that Russia's role in the global economy remains that of raw materials supplier, and that the high price of oil & natural gas is all that stands in the way of Russia becoming a fiscal train wreck.
I wouldn't be too terribly surprised if the same is true for Canada, if less severe.
What is to be done?
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.)
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.
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.
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".
That's actually a very good point. I stand corrected.
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
The Government Pension Fund of Norwa- - Wiki
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
This is the kind of thing social democratic government could do for Canada. The NDP should publicize this social democratic success story.
Big Oil, authoritarianism and Canada's petrotyranny - Bruce Livesey - Rabble.ca
'Dutch Disease': McGuinty Was Right the First Time - The Tyee - Robyn Allan
Are Albertans real Canadians, or simply wannabe Texans in longjohns?
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.
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.
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.
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.
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.
Go back and read the second-last paragraph of #26. But I doubt you'll understand even then.