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Dutch Disease plus unbalanced equalization: A shot across Alberta's oily bow

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Jim Stanford

Let's call it Dutch Disease Redux with complications of Confederation.

Since Alberta's petroleum economy has almost unquestionably hurt Ontario's manufacturing base, it is axiomatic that Ontarians will soon demand a revised deal from Confederation.

This is a reality Albertans need to think about. Some may scoff and mutter that Central Canada deserves whatever it gets -- "Let the Eastern Bastards Freeze in the Dark," and all that. But the electoral reality is that Ontario probably has the votes to make a good start on fixing this problem if voters there start to perceive it has gotten out of hand.

Alberta's crybaby notion of Confederation in the era of Stephen Harper's prime ministership is that we pay for everything through equalization payments with our vast oil wealth, and the federation is then run to our disadvantage -- even though the people doing the running are dominated by a claque of far-right Alberta politicians.

The problem with this perception is twofold:

First, the damage being done to the Central Canadian manufacturing economy by Canada's petroleum-enhanced Loonie, in other words, the so-called "Dutch Disease."

Second, Canada's equalization formula does not tell the whole story of whom is contributing what to Confederation.

Now, Alberta politicians from all three branches of the Wildrose Party (federal government, Alberta government and Alberta Opposition) can accuse politicians who speak the obvious truth of treason if they like, but this doesn't alter the unassailable facts about Canada's economic predicament, and those facts are going to winkle through to Central Canadian voters.

This is not to say Harper's federal Conservative Party can't win back their hearts by 2015, but they won't necessarily do so by advocating and adopting the polices that Alberta politicians say must be followed -- such as, for example, us dictating social policies to them.

As economist Jim Stanford wrote early last month, our current conservative political leaders in Edmonton and Ottawa, aided and abetted by the semi-official Sun News Network and market-fundamentalist think tanks, have worked hard to portray the idea Dutch Disease might afflict Canada as dangerous, foolish and virtually treasonous.

The trouble with this McCarthyist strategy, he notes, is that "it relies on vilifying and marginalizing opposition, rather than debating facts and arguments."

And the facts to be debated point strongly by to a case of Dutch Disease being experienced by Central Canada that is more severe than that experienced by the Dutch. The decline of Canadian manufacturing, writes Stanford, "is mostly a problem of consumers (both at home and abroad) not wishing to buy Canadian-made manufactures, and in that context the issue of the Loonie's decade-long appreciation (beginning in 2002) is clearly relevant."

He concludes: "Far from being 'discredited' by empirical research, the resource-driven deindustrialization hypothesis is almost universally supported by it."

As for the outflow of money from Ontario, consider the new study by economist Noah Zon of the Mowat Centre for Policy Innovation at the University of Toronto, which concluded "there is roughly an $11-billion structural gap between what Ontarians pay to the federal government and what they receive back from the federal government.

"One might assume that, given Ontario’s below average fiscal capacity, it would now be a net recipient of redistribution in the federation, but that turns out not to be the case," the report explains. "Canada’s fiscal arrangements have not evolved to reflect changing circumstances.

"As a result, Ontarians continue to see their federal taxes redistributed away from Ontario on a net basis at a time when the province can ill afford it, at a rate estimated at approximately $11 billion in the 2009-10 fiscal year, the most recent year for which numbers are published.

"The gap is almost entirely a result of federal spending and program decisions that leave Ontarians receiving less than their per capita share of spending and transfers, rather than regional inequities in revenue collection," the report says.

In its conclusion, the report notes: "Federal spending decisions are significantly skewed against the people of Ontario. The good news is that this is fixable. The federal government can, and should, reform those programs that discriminate against Ontario and Ontarians."

The obvious conclusion from Ontario's perspective: If currency distortions fuelled by Alberta's oil industry continue to disrupt Central Canada's economic wellbeing, more equalization not less is going to be required from Alberta.

It may not be obvious to our Alberta politicians, who are mostly occupied shouting down their opposition and branding it as treason, but the release of the Mowat Centre's report is more than just a way to fill a few column inches in the Toronto Star.

Whether we like it or not, combined with the fact the Dutch Disease narrative is not just going to go away because we want it to, it's a shot across Alberta's oily bow.

This post also appears on David Climenhaga's blog, Alberta Diary.

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