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(Ryan Remiorz)
(Ryan Remiorz)

Daniel Trefler

The loonacy of parity: How a strong dollar is weakening Canada Add to ...

Great nations have sterling currencies. So why are we so ill at ease with the loonie's recent rise to parity against the U.S. greenback? Because we know in our hearts that a strong currency can be as much a sign of weakness as it is of strength.

Being world class is synonymous with being innovative. So we naturally take pride in the fact that we are a modern, innovation-based economy - gone are the days of hewing wood and drawing water. Or are they? Unfortunately, our self image is at odds with reality. The real fact is that two-thirds of Canadian exports are now resource-based (oil, gas, pulp, potash, etc.). This share is up dramatically from even a decade ago, when little more than a third of our exports were resource-based.

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One of the key long-term forces driving up the loonie is the worldwide commodity boom. The world wants our oil and to buy, it needs Canadian dollars. This makes Canadian dollars valuable and translates into a higher loonie. The recent parity with the greenback is a measure of our growing resource dependence. It is a measure of our weakness.

Economists have a name for this weakness - Dutch disease. As the commodity-driven loonie rises, it becomes too expensive to produce innovative goods and services in Canada. Canadian firms exporting such world-beating products as asset management services (Manulife), regional jets (Bombardier) and addicting handhelds (RIM) have been forced by the strong dollar to move at least part of their operations to lower-cost jurisdictions. That's Dutch disease. That's the weakness of a strong loonie.

At this point, you may be thinking that Dutch disease is just code for "more whining from Canada's industrial heartland." But there is a deep question lurking beneath the surface of our collective tailing pond. Where do we want to be as an economy in the coming decades? Do we want to be an innovation-based economy? Or do we want to be a resource-based economy? Unfortunately, we can't be both. The loonie won't let us. It is no coincidence that our most resource-based provincial economies have the worst high-school dropout rates in the country. Who needs an education or the innovation potential it creates when you can work in the oil patch?

Canada has regressed. It is time to step back and ask ourselves whether this is what we want. The choice is ours: Sit back while world commodity demand drowns us in our own tailings, or react aggressively and strategically.

The strategic choice is not that complicated. For example, former Alberta premier Peter Lougheed has called for the orderly development of the oil sands. His idea is to slow down the granting of new permits so that companies have a chance to regroup and refocus on innovative solutions to the many cost-escalating problems plaguing the sector. And by slowing down development, Mr. Lougheed's plan relieves some of the upward pressure on the loonie that is killing our most innovative, export-oriented firms.

Some of you may still want to cheer at the loonie's summiting of parity with the greenback. Sure, let's party. But after the guests are gone and the kitchen cleaned, let's remember the dangers of sliding back into a resource-based economy. And then let's do something about it.

Daniel Trefler is the J. Douglas and Ruth Grant Canada Research Chair in Competitiveness and Prosperity at the Rotman Schools of Management and a research fellow at the Canadian Institute for Advanced Research.

 

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