Conventional wisdom says that Canada is fighting a crippling bout of Dutch Disease.
Canada’s petro-infused currency, which has risen 55 per cent against the U.S. dollar in the past decade, continues to linger around parity with the greenback. That is clobbering exports, making Canadian auto plants uncompetitive and hammering the manufacturing heartland of Ontario and Quebec – or so the thinking goes.
But the conventional wisdom is wrong, according to three researchers who will publish a study Wednesday that largely debunks the Dutch Disease theory, which has become a frequent talking point amid rising tensions between the oil-rich West and battered factories of the East.
Several key manufacturing industries often linked to the phenomenon show no symptoms at all of currency damage, including autos, food, aerospace and heavy industry, according to the report, Dutch Disease or Failure to Compete?, being released Wednesday.
At best, Canada has a “mild case” of the disease, the report by the Institute for Research on Public Policy concludes – more a touch of flu than a life-threatening illness.
The perceived severity of the disease is likely to be a key driver of government policy in Canada for years to come. If policy makers believe the problem is real and worsening, support for radical solutions, such as capping factory wages or pegging the loonie to the U.S. dollar, could gain traction.
But the researchers suggest that major policy moves aren’t warranted. Indeed, they challenge the assumption that the loonie is a “petro-currency” at all. More important to the currency than the price of crude is the long-term impact of non-energy commodity prices, including wheat and various metals mined in Eastern Canada.
“You can’t call this an Alberta versus Ontario thing because some of this exchange rate movement is being driven by demand for commodities mined in Northern Ontario and Quebec,” argued IRPP research director Jeremy Leonard, who wrote the report with University of Saskatchewan economist Richard Gray, and Mohammad Shakeri, an economist at Agriculture and Agri-Food Canada. “It’s not a productive discussion to pit one region against another.”
And yet Dutch Disease has become a rallying cry for federal NDP leader Thomas Mulcair and Ontario Premier Dalton McGuinty, who have both attacked the Harper government’s unwavering support for the oil sands. Mr. McGuinty said he’d rather have a low dollar than a fast-growing oil and gas industry – comments that enraged Alberta Premier Alison Redford and Saskatchewan Premier Brad Wall, whose provinces are enjoying an energy boom.
Mr. Mulcair has complained that the high dollar has “hollowed out the manufacturing sector” and cost a half-million jobs. “The Canadian dollar is being held artificially high, which is fine if you're going to Walt Disney World, [but]not so good if you want to sell your manufactured product because the American clients ... can no longer afford to buy it,” Mr. Mulcair told CBC Radio last week.
That’s not what the IRPP report found. It identified just 25 out of 80 factory sectors – representing barely a quarter of Canada’s factory output – that show significant injury from the high loonie relative to the U.S. dollar. The impact is most severe in small, labour-intensive industries, such as textiles, apparel, leather products, heating and ventilating equipment, furniture and railway cars.
The high dollar has been a good thing for another nine industries, including the fertilizer industry, where prices and demand have run up with soaring global energy demand. The aerospace industry and food industries have also faired reasonably well in a high-dollar environment. There was no impact in many other sectors.
Perhaps most surprisingly, the economists concluded that the dollar had no part in the struggles of auto manufacturers and parts makers – an industry often held up as “the poster child” of Dutch Disease. Instead, the report says competition from South Korean auto makers, tumbling demand in the recession and lagging productivity growth are the real culprits.
“It’s not just high resource prices that account for what’s been going on” in the factory sector, Mr. Leonard said. “It’s really the impact of China and suppliers in markets that are completely unrelated to resources. There’s just a lot more competitive pressure in Canada’s traditional markets.”
Some experts have linked Dutch Disease to Canada’s lagging investment in research and development. Instead, the report found that 80 per cent of factory R&D is done in industries largely unaffected by the currency, including computers and electronics.
There is a treatment for the relatively mild impacts of Dutch Disease, the authors suggest. The federal government should pump tax revenues into big infrastructure that bolster the competitiveness of manufacturers. And the energy-rich provinces could also help “neutralize” the upward pressure on the loonie by investing “windfall revenues” offshore through sovereign wealth funds. And they rejected more radical solutions, such as capping manufacturing wages or adopting the greenback outright.