Alberta Premier Alison Redford said NDP leader Thomas Mulcair was "divisive and ill-informed." Saskatchewan Premier Brad Wall said Mulcair was "risking Canadian economic advantage for the sake of politics."
Conservative Finance Minister Jim Flaherty said, " I think his (Mulcair's) logic is off and doesn't make sense." Former federal Liberal leader Stephane Dion said, "Mr. Mulcair's comments are factually wrong and politically ill-advised. We don't need another divisive leader -- we already have Stephen Harper."
Media pundits jumped into the fray accusing Mulcair of playing a diabolical game, launching a political jeremiad to write-off the West and establish a beachhead in Ontario with which he could put together a winning formula for the next election. What was his sin? Mulcair suggested that Canada suffers from Dutch disease.
What is this disease whereof they speak?
Dutch Disease
In 1959 natural gas (estimated reserves of over 100 trillion cubic feet) was discovered in the Groningen gas fields in northern Holland. Their exploitation created a huge economic boom, which paradoxically crippled other elements of the economy.
Why? Revenues from the sales of natural gas appreciated the value of the guilder (the Dutch currency), in large measure because the Dutch government spent the money profligately. Between 1959 and 1981 government spending in the Netherlands increased from 10 billion guilders to over 130 billion guilders. Over the same period the value of the guilder increased by 35 per cent in real terms.
The increased value of the currency made exports of goods, particularly manufactured ones, much more expensive leading to a significant decline of the manufacturing sector in Holland. For example, between 1964 and 1986 the number of industrial workers in the Netherlands fell from 1.823 million to 1.381 million, a 25 per cent reduction in the labour force.
The impact of this "disease" was to cause a long period of stagnant growth and unemployment, and major, and to some extent permanent, shifts in economic sectoral structure of the country. This phenomenon, of revenues from a booming resources sector damaging the manufacturing sector, became known as Dutch disease following a 1982 investigation by economists W. Max Corden and J. Peter Neary.
Does Canada suffer from Dutch Disease?
The short answer is yes. A quick historical review: in 1998 the average price for West Texas Intermediate crude oil was $16.74; it is currently trading at $90.72, having more than quintupled in price. While the extraction of oil from bitumen (a.k.a. "tar") is costly, difficult, and requires increasingly more energy input per barrel of oil output, the meteoric rise of oil prices has made it economically worth pursuing.
Coincident with this has been the meteoric rise of the Canadian dollar that in 1998 traded at $0.63 against the US dollar. It rose to a high of $1.10 in 2007 and is now trading at $0.98, 55 per cent higher than it was in 1998. This synchronicity of is not coincidental; the rising price of oil has converted the Canadian dollar into a petrocurrency whose value is increasingly linked to the price of oil.
And what's happened with manufacturing over this time? Between 1980 and 2000 the manufacturing share of Canadian GDP remained more or less stable at approximately 17 per cent. Since then it has declined at a very steep rate to approximately 12 percent today, a 30 per cent decline in value (Statistics Canada). Furthermore, between 1998 and 2006 the share of Canadian manufacturing employment fell by 16 per cent (Beine, Bos & Coulombe).
As an illustration of how an inflated petrocurrency affects manufacturing, consider this: Canada's foremost manufactured export is motor vehicles. Between 2001 and 2007 the unit value of Canada's exported vehicles rose from US$16,404 to US$18,748. But with the Canadian currency dancing to the tune of inflating oil prices the price realized in Canada in Canadian dollars fell from $26,039 to $18,201, a 30 per cent decline in revenues (Bimenyimana & Vallée). Ouch! As Andrew Nikiforuk in Tar Sands: Dirty Oil and the future of a Continent, writes, "Oil can reduce every other economic sector, no matter how tall, to a midget."
There are, however, many factors at play in an economy and this apparent coincidence cannot simply be taken at face value. Consequently, economists Michel Beine, Charles Bos, and Serge Coulombe investigated the impact of the increase of oil prices, the consequent spectacular development of the Athabaska bitumen sands, and their impact on the Canadian economy with a series of sophisticated statistical analyses in order to carefully separate Dutch disease from other factors in the economy. Their results showed that "54 per cent of the manufacturing employment loss due to exchange rate development between 2002 and 2007 are related to a Dutch disease phenomenon. The remaining 46 per cent can be ascribed to the weakness of the US currency."
Economists Célestin Bimenyimana and Luc Vallée concur with an even more recent 2011 study and point out a particularly troubling feature of the Canadian strain of Dutch disease. While the Netherlands are a geographically small and socio-culturally homogenous country, the same is not true for Canada. In the Netherlands workers who lost jobs in manufacturing could readily retrain and find positions in the gas industry.
In Canada, 95 per cent of the nation's oil reserves are in Alberta while 75 per cent of manufacturing is based in Ontario and Quebec. Geography, culture, language, and inter-provincial regulatory barriers (i.e., recognition of professional credentials in the building trades) limits labour mobility (or socially hollows out communities in central and Atlantic Canada). In either case when the resource boom ends (as it inevitably must) the consequences are the same; the manufacturing sector is crippled, perhaps irrevocably, as manufacturing shifts to other portions of the globe (India, China, Brazil, Asia-Pacific, etc.) where low labour costs and lax regulations are ready to poach business from developed nations.
Dutch Disease denial
Dutch disease is a real economic phenomenon that has been witnessed and investigated in the economies of many nations that have seen resource booms (Australia, Indonesia, Nigeria, Philippines, Russia, Norway, United Kingdom, etc.). It is, furthermore, alive and well and living in Canada. A recent study by the Pembina Institute, In the Shadow of the Boom: How Oilsands development is reshaping Canada's economy by Nathan Lemphers and Dan Woynillowicz has identified a specific strain of Dutch disease (a.k.a. "oil sands fever") that is creating asymmetries the Canadian economy described above. How then to explain the fierce attacks on Thomas Mulcair by premiers Redford, and Wall, Finance Minister Flaherty, and Stephane Dion, and the jeremiads of assorted pundits such as David Frum who celebrated Mulcair's "deserved media beating over his 'Dutch disease' remarks" in the National Post?
Joining the ranks of Holocaust denial, climate change denial, evolution denial, the denial of tobacco use leading to lung cancer, and extending back to the campaign against Galileo's assertion that the earth orbits the sun, we have a new phenomenon -- Dutch disease denial. Like other such historical movements it consists of looking reality in the face, and then pretending it doesn't exist.
In the case of Dutch disease denial, it is clear what drives the phenomenon -- petro-greed, climate change denial, and a conviction that wholesale, unregulated, untrammeled resource exploitation should be the defining feature of economic development. The global petroleum industry is the largest and most powerful economic force on the planet. Having firmly attached themselves to the earth's oily teat, they are loath to let go; climate change, peak oil, Dutch disease, or anything else notwithstanding. Sucking the earth dry and locked into arrested infantility they are unable to grow up and responsibly contemplate a sustainable future.
The vaccine
This situation might sound like a zero sum game (manufacturing's loss is petroleum's gain and vice versa) but in fact (setting aside, for a moment the issue of climate change) there are uncomplicated and effective solutions to this problem which economists such as Beine, Bos, Coulombe, Bimenyimana, and Vallée and analysts like Nikiforuk have all taken pains to point out.
1. First: slow down. The frenzied (and accelerating) pace of development of the tar sands undermines all efforts at rational development and use of the resource, not only in regard to Dutch disease, but in regard to every one of the myriad problems that plague this resource. Climate change, rational taxation, a national energy strategy, infrastructure and work force issues, pollution, impacts on aboriginal people's, social issues, planning issues, energy security ... everything is being swept into an insane vortex of activity, in which the long-term potential of Alberta bitumen within a framework of energy security, a transition to a sustainable economy, and the development of renewable energy is being utterly lost. The principal beneficiaries of this process are the executives and shareholders of the petroleum multinationals and greedy foreign markets whose only interest is exploiting this resource as rapidly as possible.
2. Establish a national sovereign fund for bitumen sands royalties. Separate the use of this fund from general provincial and federal spending, and in particular, make investments from this fund in foreign economies. This both saves a lot of money for the proverbial rainy day, and it can limit currency inflation. This was the one successful approach adopted by the government of Norway when it established the Petroleum Fund of Norway (now called the Government Pension Fund of Norway) in 1967. With a current value of US$613 billion (one percent of global equity markets) it is now the largest fund of its kind in the world, and the largest stock owner in Europe.
In Canada, the Alberta provincial government established the Heritage Savings Trust Fund in 1976 and for a decade 30 per cent of province's oil and gas revenues went to the fund, but contributions ceased in 1987. Since then the province has been a) spending oil revenues like a drunken sailor on infrastructure and other programs; b) has been drawing interest out of the fund and plowing it into general revenues; and c) has no policy directed at investing resource revenues in foreign assets -- in other words everything it can do to inflate the value of the currency. And, of course, there is no Canadian national fund of this kind.
3. Andrew Nikiforuk in Tar Sands points to Alberta's abysmally low royalties for bitumen extraction, a situation which has benefited oil companies, forfeiting monies which ought to accrue to Albertans and Canadians, and has lead to inefficient use of capital, sped development, accelerated inflation, and bedeviled project management. The province charges oil companies a one percent royalty on tar sands revenues until they recoup all their investments (thereafter a 25 per cent royalty rate kicks in). The Alberta government charges the lowest rates of almost any government in the world; its share of all oil revenues is only 39 per cent. Compare this to the 76 per cent that Norway collects. Nikiforuk urges the Alberta government to collect higher, more rational royalties and to introduce a provincial sales tax.
4. Economists such as Bimenyimana and Vallée urge the federal government to undertake economic measures, such as aggressive research and development (R&D) subsidies and tax credits, to maintain and strengthen the manufacturing sector pointing out that this would not only lessen the "East-West economic growth divide and wealth disparities, it would also ensure that, years down the road, when the oil boom is over, Canada remains competitive in sectors that cater to the manufacturing industry."
It is time for Canadian governments (federal and provincial) to get their collective heads out of the tar sands, stop trying to shoot the messenger if they don't like the message, get out of denial, and read the economic writing on the wall.
Dutch disease is writ large for anyone with the wit to open their eyes. It is a problem; there are solutions. It's time government policy put the interests of Canadians first rather than catering to the desires of the multinational oil conglomerates. Oil can not only diminish other economic sectors to a midget, but the minds of politicians into intellectual dwarves.
Christopher Majka is a biologist, environmentalist, policy analyst, and arts advocate. He conducts research on the ecology, biodiversity and biosystematics of invertebrates, particularly beetles. He is a member of the Project Democracy team.
Thank you Christopher Majk for explaining Dutch Disease in a manner us economic laymen can comprehend. I was very confused by this issue because opposition and news paper spent the lion's share of their time criticizing Mulcair for citing it, but inadequately explained the phenomena itself. When I searched for information, the verbiage was too technical to grasp. So I was happy to read this and gain a better understanding.
Thank you Christopher Majk for explaining Dutch Disease in a manner us economic laymen can comprehend. I was very confused by this issue because opposition and news paper spent the lion's share of their time criticizing Mulcair for citing it, but inadequately explained the phenomena itself. When I searched for information, the verbiage was too technical to grasp. So I was happy to read this and gain a better understanding.
Fortunately democracy is such that your characterization of these issues is simply that - yours. You don't have any power to grant any freedoms, nor is your interpretation of what promotes democracy, equality, or environmental justice anything more than your interpretation.
Thank you, Christopher.
In return, I hereby grant you the freedom to characterize democracy, equality, and environmental justice as Utopian scenarios, while believing that capitalism can be made to achieve any of those things by tinkering with markets and offering public money incentives and subsidies to private capitalists. I'll leave it to readers to determine which Canadians' interests are served by your proposals.
You can lament whatever you wish and pursue whatever Utopian scenarios you desire. I'll leave it to readers to determine whether the four measures I outline to "put the interests of Canadians first rather than catering to the desires of the multinational oil conglomerates" represent "neoliberal market capitalism." Thanks for your contribution.
Yes, I had surmised long ago that you were not interested in considering anything outside the boundaries of neoliberal market capitalism. I am also well aware that the above article is based upon trying to work within those boundaries, through such methods as having the federal government hand out "aggressive research and development (R&D) subsidies and tax credits" - a.k.a. corporate welfare. That's why I lamented the lack of vision it represents.
As I've said before (and this is the final time I'm going to restate this, since this apparently is what you are missing) some of your points are valid ones that I agree with. Your economic analysis is far too simplistic, however. Capitalist market economics surely do effect the specifics of all economic phenomenon such as inflation, deflation, and Dutch Disease. However, nationalizing the oil industry in Canada (however desierable that might be) would not cause these phenomena to vanish in a puff of smoke. The existing economic universe is a complex ecology of causes and effects.
If it's your desire to posit a Utopian vision of how a socialized world economy would work, where all free-market forces have been eliminated and the means of production and distribution of all goods and services have been nationalized ... by all means do so. This may be a worthwhile excercise, but it's not what I'm interested in, and it is not what the above article is based upon. Kind regards.
You continue to dismiss the relevance of who owns the means of production (as if it were some minor detail of little consequence) to the issues of (a) where capital investment is to be made and (b) who gets to decide. "Overly inflated or overly deflated currency" are both a result and a cause of the distortions to the economy that occur through the system of profit-driven market economics. An example of those distortions is the phenomenon known as Dutch Disease. Such distortions do not occur because somebody decided they were a good idea. They come about unbidden, as a result of blind market forces. They are the price we pay for having an economy where the means of production are privately owned and investment decisions are made by private individuals and corporations with but a single aim - the maximization of profit. This is what drives the market and ultimately affects the exchange value of the national currency.
An economy operated on a different basis, as I have outlined previously, would not be subject to the same blind laws of market economics and maximization of profit. It would, for example, limit the development of the tar sands, by taking into consideration not just profit maximization but also environmental concerns, the rights of the aboriginal population, international obligations to reduce fossil fuel consumption and carbon emissions, and the need for a planned and balanced economy, among other things. All the possible consequences of investment alternatives would be considered, and decided rationally and democratically. Unintended consequences would be minimized. The well-being of the population would be a paramount consideration.
The fact that we do not at present have such a system in place is what has led to the demise of manufacturing, the inflated dollar, and a myriad other distortions in the economy. That's the relevance of who owns and controls the means of production that you miss.
@ M. Spector: I have never claimed that "the foreign exchange value of the dollar on international money markets must affect the Canadian economy the same regardless of who owns the means of production or who profits from them." As I pointed out "The economic universe is a complex ecology of causes and effects." The points you make in your final paragraph are valid ones. My article, however, addresses a different set of issues. And it nevertheless continues to be true that an overly inflated or overly deflated currencey is not beneficial to an economy, no matter who owns the means of production.
The value of a currency, in the sense in which you use it here, is its exchange value as determined by international money markets. To whatever extent that the exchange value of the Canadian dollar at any given time approximates the value of the underlying economy of Canada, it is purely coincidental. International money markets are notoriously volatile, driven entirely by greed and greed-related fear, and subject to many different influences, both real and speculative, that change from day to day. It would be folly to rely on capricious market forces to find some sort of "balance" between the Canadian dollar and the Canadian economy.
You say "overly inflated or overly deflated currencies do no one any good, workers/consumers included." And yet clearly there are some who profit handsomely as a result of overvalued and undervalued currency, and I'm not just talking about the currency speculators who move billions of dollars around the world electronically every hour of the day and night, buying cheap and selling dear. There are also the Canadian investors who enjoy increased value in their dividends paid in foreign currency when the Canadian dollar drops; there are the U.S.-based multinationals operating in Canada whose payroll costs go up or down with the Canadian dollar. The film and television industry in Canada flourishes when the Canadian dollar is low. An overly inflated Canadian dollar brings with it a resurgence in cross-border shoppping, to the delight of consumers. In fact, it is wrong to ascribe to all Canadians the same interests. We have a myriad of competing interests; not everyone suffers or benefits the same from exchange rate fluctuations.
Which leads me to the point that you clearly fail to grasp. You maintain that the foreign exchange value of the dollar on international money markets must affect the Canadian economy the same regardless of who owns the means of production or who profits from them. On the contrary, private ownership of the means of production dictates that investment decisions and flows of capital must be aimed solely at maximizing profits, whereas public and collective forms of capital ownership allow for other, more socially beneficial considerations to take priority. This makes a huge difference, both in the range of possibilities for economic activity and in the choices that are made from among those possibilities. Manufacturing enterprises that cannot operate at a profit under the iron laws of capitalism and the markets may nonetheless flourish under conditions where there is no imperative to extract surplus value from the manufacture of goods and no life-or-death dependency on expansion into foreign markets in order to survive.
@ M. Spector: The economic universe is a complex ecology of causes and effects. Ultimately, the value of a currency should approximate the value of the underlying economy; overly inflated or overly deflated currencies do no one any good, workers/consumers included. The arguement being made here (and by the economists on whose work this is based upon) is not so much that lowering the value of the dollar is the way to revitalize manufacturing but that a properly balanced currencey is one of the precursors to a healthier and better balanced economy, which in turn benefits manufacturing and a whole host of other enterprises in other sectors (such as resources) whose health is connected to exports. A balanced currencey benefits workers and consumers as well.
As to your other points about an economy not reliant on handsome profits to owners, and production being a means to not only human needs but human fulfilment (I would add), I fully agree. But whoever the means of production are owned by, and whomever the profits benefit, the currencey that represents that economy still needs to be neither overly inflated or deflated if the internal structure of that economy is not to be distorted. And that's what we have now with the Canadian dollar having become a petro-currencey.
"ausca" misses the fact that productivity in manufacturing is a function of capital investment. Manufacturing productivity in Ontario is bound to suffer when capital flees manufacturing and invests in the more lucrative tar sands. Low productivity is not a cause, but a result, of the flight of capital from manufacturing to resource extraction.
One aspect of the international exchange rate that is often overlooked in these discussions is the point of view of the worker/consumer - i.e., the vast majority of Canadians. Yes, the capitalists who own manufacturing enterprises are hurt by the high dollar resulting from a hyperactive and super-profitable resource extraction economy. But the average Canadian is hurt when the dollar declines in value; her paycheque is worth less than before, and will buy fewer consumer goods than previously - especially when most of those consumer goods are imported, thanks in part to the collapse of domestic manufacturing.
It's a shame that lowering the value of the dollar, and thus impoverishing the working class, is seen as a legitimate way to encourage the revitalization of manufacturing. It would be nice if progressive economists could conceive of a society in which investment in manufacturing, and thus employment, does not depend solely on the promise of handsome profits to the owners of private capital. How about an economy where the means of production are socially owned, investments are democratically planned and controlled, and production is regarded as a means to meet human needs, rather than to produce private profits for the rich?
@ Tim Segulin (ausca): good points throughout. Mulcair has proposed a full cost accounting for exploitation of the bitumen sands (i.e., leading to some sort of carbon tax on extraction) that would account for the environmental damage (climate change and otherwise) that is being done by the exploitation and use of the bitumen sands. This is a sound approach. In general, pursuing measures outlined in the four points in "The Vaccine" section of my article would do much in terms of curing Dutch disease in Canada and assisting the manufracturing sector, and other resource sectors, impacted by the high value of the Canadian dollar. How much could/would Canadian manufacturing recover? Who knows. In Holland some of the damage was permanent. Once manufacturing flees overseas it may not be easy to coax some of it back.
Aside from the economics of this situation are, of course, environmental issues. If climate change proceeds apace as it is currently doing, and particularly if positive feedback loops in relation to methans emissions in the arctic occur, we may have no choice but to radically attenuate bitumen sands extraction if we don't want to destroy the planet. Runaway climate change would have such devastating economic (as well as social and environmental) impacts that there can be no possibility to trading off environment for economics. Armegeddon makes no sense from any perspective.
I am not an economist and so cannot dispute the correlations in value of the $CAD with the rise of the cost of oil, nor the drop in manufacturing employment over the same period. Despite attacks on Mulcair for saying so, I think there is clearly a case to argue that Canada's economy is infected with Dutch disease, but my question is how much does that alone account for the decline in Ontario and Quebec manufacturing?
I saw no study quoted in this piece that attempted to estimate how much the woes of Canadian manufacturing are related to our often claimed low productivity. Do we pay ourselves too much? Do we just not produce enough product for a reasonable rate of income?
If the oil sands suddenly disappeared, would central Canadian manufactring suddenly revive and re-employ the half million or so workers (by one estimate) it has lost over the last decade, or has that parade already passed and those jobs been irreversibly exported to China and other low-rate jurisdictions?
If that were true, how could we blame the oil patch although our inflated 'petro-dollar' might have accelerated this trend.
Despite the substantial downsides to Alberta's rabid oil sands development, it remains our single largest export and it's true - all Canada benefits - at least for now. Mulcair has to be careful to not be seen proposing or to allow himself to be deliberately misinterpreted as arguing that it should somehow be dramatically throttled or shut down. I don't believe he argued that, but some of the few demonstrable strengths of the Prime Minister of Calgary is his excellence at partisan dirty tricks, smear attacks and 24/7 sustained, devious propaganda. It's not enough for Mulcair to argue that the oil patch has damaged central Canadian manufacturing - a means must be proposed by which both can co-exist, and by which the eventual full remediation of the toxic moonscape being furiously built in Alberta right now can be paid for from the bundles of cash we are frantically stuffing into our pockets.
If we don't do that, Alberta could well end up with a massive, permanent environmental catastrophe that would make Nova Scotia's Cape Breton Tar Ponds look like a hot tub.
I think Mulcair is at least partly right about Canada's 'Dutch Disease', but he must be fully equipped with all the 'facts' and prepared to offer pragmatic, workable solutions.
Besides being the dirtiest way to acquire oil on the planet, the oil patch is also the most expensive. It only makes economic sense as long as oil prices exceed $US 64-80 and further development will require oil prices to be closer to $100 bbl (which argues in favour of Harper's and Alberta's preference for maximum exploitation ASAP while we can). If prices fall below these levels, we will lose our biggest export - and it could happen quickly. Sure the $CAD will fall but will that alone revive manufacturing jobs and more than offset the job losses in the resource sector? (That's the thing with economics - nobody really knows for sure, but there is no shortage of untestable theories. We can all see what we have now, but economists don't seem to make reliable prophets - so who do you believe, if any?).
Mulcair will have to do attempt a serious, adult conversation in the face of hysterical and dishonest howls that his proposals will kill good jobs, disuade investment, provoke a recession and divide Canadians for purely political gain (something Harper would never do). Mulcair's proposals must be able to hold water well enough to reach over the heads of the Conservatives directly to the voting public. Remember that despite their abysmal record, most people polled still believe the Conservatives are the party best equipped to manage the economy.
No Opposition has a shot at government unless it can challenge that. Oppositons don't win elections, governments lose them.
The Federal NDP has never faced such a challenge before. They have never been Her Majesty's loyal Opposition before. They have never had to take on the power and money of the resource sector juggernaut before. To have a remote shot at governing, they must master this brief, convincingly and quickly. They had better be quick swats, for the good of all of us!
Fingers crossed Tom.
Here's a working link to the paper by Michel Beine, Charles Bos, and Serge Columbe. (.pdf)
Seems there is no room for common sense anywhere in Canada nowadays. Canadians don't even recognize it anymore. If anything doesn't contain the words 'jobs or economy', then by all means dismiss it or be against it or vote for Harper.
Thanks to the author for this contribution to reality.
Man am I tired. Go Tom, I voted for your energy.
After the Dippers handling of this bill...
http://www.theglobeandmail.com/news/national/british-columbia/bc-politic...
...Canadian voters can't trust Mulcair and his crew to form a government.