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Stephen Gordon Credit: Alexandre Deslauriers.
Stephen Gordon Credit: Alexandre Deslauriers.


Dutch disease? Economic hypochondria Add to ...

The increase in the price of oil and other resources has been accompanied by increasing references to so-called Dutch disease; a recent example is the interview NDP Leader Thomas Mulcair gave on CBC Radio’s The House last weekend. According to this analysis, high resource prices are driving up the value of the Canadian dollar, making manufacturing exports less competitive on world markets and causing manufacturing employment to fall by some 500,000 jobs since its peak in 2002. The argument seems plausible, but it is incomplete and cannot be used as a basis for economic policy.

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The appreciating Canadian dollar has little to do with the decline in manufacturing; employment has been declining worldwide for decades. Changes in relative prices are more important. Producer prices for manufactured goods have increased by about 15 per cent since 2002, while the Bank of Canada’s commodity price index has more than doubled. Any attempt to promote manufacturing exports by depreciating the dollar is doomed to fail, since a lower Canadian dollar will also benefit resource exporters. Capital and labour will always move from sectors where prices are soft to sectors where demand is strong, regardless of what the exchange rate is doing.

But what about those 500,000 lost jobs? An underappreciated fact of the Canadian labour market is the size of the flows in and out of employment. More than 100,000 workers are laid off every month, and even more are hired. Before the recession, the fall in employment manufacturing was largely the result of attrition – workers who quit were not replaced. The loss of 500,000 manufacturing jobs since 2002 has been more than offset by the creation of 2.5 million jobs in other sectors.

These new jobs are better-paying for the most part, although not everyone has become better off. An Industry Canada study estimates that more than half of the income growth between 2000 and 2007 was generated by the increase in export prices. These gains were broadly based. After stagnating for more than a decade, real median wages across Canada showed strong growth – even in Ontario.

Penalizing exports of raw resources could create processing jobs, but those gains will be more than offset by losses elsewhere. If processing in Canada were profitable under world prices, no government intervention would be necessary. The only way policy can generate significantly more processing jobs is by forcing producers of raw materials to accept lower prices or by forcing provincial governments to accept lower royalties. This would be a simple redistribution of income if production is held constant. But it is much more likely that producers would respond to these lower prices by reducing output. Total output and income would fall.

The shift to increased oil production also raises crucial environmental issues. There is a strong – indeed, overwhelmingly convincing – case to be made for a carbon tax so that producers of greenhouse gas emissions pay the full cost of burning fossil fuels. But it is not obvious that pricing carbon would create manufacturing jobs. Many firms are barely surviving as it is, and they may not be able to absorb even a modest increase in their costs. And if manufacturing firms are exempted, it would be difficult to defend the measure against accusations that it is simply a mechanism to redistribute income away from resource-rich provinces.

The shift away from manufacturing is part of a process that has increased incomes across Canada. “Dutch disease” is not a problem that needs solving.

Stephen Gordon is a regular contributor to The Globe’s Economy Lab blog.

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