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Forget Dutch: Professor blames ‘Canadian disease’ for export woes Add to ...

These are stories Report on Business is following Wednesday, Oct. 2, 2013.

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Blame Canada
So-called Dutch disease is only part of the issue. Of far greater importance, says economics professor Serge Coulombe, is what he calls “Canadian disease.”

Canadians have been inundated with reports of Dutch disease. That’s when high commodity prices – for oil, say – damage a nation’s manufacturing exports by driving up the value of its currency.

Canada’s loonie, as its dollar coin is known, surged between 2002 and 2008, as did commodities, as the U.S. greenback weakened.

“But a close look at what happened during that period reveals that the Dutch disease mechanism was only part of the story,” Prof. Coulombe says in a new paper published by the University of Calgary’s School of Public Policy.

“The other part, and quantitatively the most important, is an affliction of an altogether different providence: Canadian disease,” writes the University of Ottawa economics professor.

Canadian disease, he says, is the economic woe sparked by Canada’s “extraordinarily heavy reliance” on trade with the United States, our biggest market.

“As a consequence, a sudden depreciation of the U.S. dollar will deteriorate the competitiveness of Canadian manufacturing exporters,” Prof. Coulombe writes.

“Such a phenomenon was at work during the ‘Great Appreciation’ of the Canadian dollar between 2002 and 2008 – the largest such appreciation on record in this country.”

Because the decline in the U.S. dollar was not connected to rising resource prices, the damage to Canadian manufacturers can’t be blamed on Dutch disease, the professor says, blaming Canadian disease for about two-thirds of the job losses related to the stronger loonie among export-sensitive manufacturers in that period.

Because the Canadian dollar is partly pushed up and down by the change in resource prices, and because that can hurt manufacturers, it’s a “Dutch Affair,” which “becomes a disease in the long run when the non-renewable resource is depleted and the manufacturing base is gone,” Prof. Coulombe says.

“New manufacturing activities might not reappear due to a variety of obstacles,” he says, adding that time will tell whether “the Affair is likely to become a disease.”

Cerberus said to eye BlackBerry
The BlackBerry Ltd. auction is reportedly drawing the eye of Cerberus Capital Management LP, the powerful U.S. private equity player, as well as other possible suitors.

Sources told The Globe and Mail's Jacquie McNish that several parties have indicated an interest in joining a proposed $4.7-billion (U.S.) takeover by Fairfax Financial Holdings. But all interest is preliminary at this stage.

At the same time, The Wall Street Journal reports that Cerberus plans to sign a confidentiality pact so it can scour BlackBerry’s books. That doesn’t mean it will take a run at the embattled company, however.

Fairfax has struck a tentative deal to lead a consortium in a buyout of BlackBerry. But the company’s stock price remains well below the proposed $9-a-share takeover as investors question whether a deal will be done, despite repeated assurances from Fairfax chief executive officer Prem Watsa.

BlackBerry shares gained 0.5 per cent today to $7.96.

Today’s report comes in the wake of a new regulatory filing from BlackBerry that highlights how the erosion of its once-mighty business is spreading to areas that had still been strong. Last Friday, BlackBerry posted a second-quarter loss of almost $1-billion, taking a massive hit on inventory of its new Z10 models.

In new documents filed yesterday with the Securities and Exchange Commission, BlackBerry said it also expects a hit of $400-million in restructuring charges as it begins to slash 40 per cent of its work force and take a knife to operating expenses. The comments are similar to those in a lengthy earnings document posted on BlackBerry's website.

The company also plans a retreat from the consumer market to focus on business customers, where it first made its mark when it ruled the industry.

In the SEC documents, BlackBerry paints a fascinating picture of its rise and fall since its founding in Waterloo, Ont., in 1984, describing how it “revolutionized the mobile industry with the introduction of the BlackBerry solution in 1999.”

Now, though, it’s suffering in the key U.S. market, and its troubles are spreading globally, eating into what had still been an area of strength.

“The smartphone market is maturing, resulting in lower growth rates, particularly in the high-end segment of the market,” BlackBerry said in its regulatory document.

“The company has experienced a decline in demand for its products and in its overall market share,” it added in the filing.

“The intense competition impacting the company’s financial and operation results that previously affected demand in the United States market is now being experienced globally, including in international markets where the company has historically experienced rapid growth.”

BlackBerry’s rivals are now jumping into those global markets with high-end wireless devices and with “lower end Android-based devices that compete with the company’s lower cost devices.”

The company also talks about the growing number of apps available on competing systems.

“The decline can also be attributed to consumer preferences for devices with access to the broadest number of applications, such as those available in the iOS and Android environments,” it said.

BlackBerry was referring there to the operating system for Apple Inc.’s iPhone and for devices running Google Inc.’s wildly popular Android.

It also noted a “continued decline” in services revenues.

Analyst Steven Li of Raymond James noted today that services revenue is now down 28 per cent from a year ago, and is projected to decline by a further 12 per cent in the third quarter, a greater fall than he had projected.

Around the world, BlackBerry cited declines in revenue of $454-million in North America, largely because of the United States, $401-million in Europe, the Middle East and Africa, $324-million in Latin America, and $109-million in the Asia Pacific region.

Fairfax Financial Holdings Ltd. has struck a tentative deal to lead a consortium that would acquire BlackBerry for $4.7-billion, after several weeks of due diligence that end in early November.

Markets, however, question whether the deal will be done, at least at the proposed $9 a share, which is why BlackBerry’s stock price is far below that figure.

Fairfax’s chief executive officer, Prem Watsa, has said, however, that he’s confident of taking BlackBerry private.

“We note the board (who has significantly more information than we do about the state of affairs at BBRY) has approved the $9 offer,” said Mr. Li, referring to BlackBerry by its U.S. stock symbol.

“Fairfax is expected to complete its due diligence by Nov. 4. We are not expecting a higher offer and maintain our market perform rating.”

Vancouver home sales soar
Housing sales surged 63.8 per cent in Greater Vancouver last month, bouncing back from a slump a year ago, The Globe and Mail's Brent Jang reports.

There were 2,483 homes sold on the Multiple Listing Service last month, up from 1,516 in September of 2012, the Real Estate Board of Greater Vancouver said today.

“While sales are up considerably from last year, it’s important to note that September 2012 sales were among the lowest we’ve seen in nearly three decades,” board president Sandra Wyant said in a statement.

Last month’s sales were 1 per cent below the 10-year average for September, she noted.

Report disappoints
The ADP jobs report in the United States disappointed markets today, coming in below what had been expected in terms of employment in the private sector.

The report showed job gains at 166,000 in September, less than the 180,000 projected.

Some economists believe the report will stop the Federal Reserve from easing its stimulus program this month.

The U.S. government had been scheduled to release its key jobs report on Friday, but that’s now unlikely given the shutdown.

“If the Labor Department remains shuttered on Friday, it will postpone the release of the nonfarm payrolls report,” said senior economist Sal Guatieri of BMO Nesbitt Burns.

“This means the ADP report might be our best guide to actual job growth in the month,” he added in a research note.

“Its track record is far from perfect, but the picture it paints is one of still-lacklustre job creation.”

Would Washington have shut down if members of Congress were paid?
There’s a nifty amendment to the U.S. Constitution that effectively says you can shut down your business and still get paid. Unlike the people you’re throwing out of work. If you’re one of the 533 members of Congress.

Which begs the question: How might the shutdown of Washington have unfolded in the absence of the 27th Amendment?

The amendment says this: “No law, varying the compensation for the services of Senators and Representatives, shall take effect, until an election of Representatives shall have intervened.”

What it means is that members of Congress can’t not be paid the $174,000 (U.S.) salary due those who aren’t leaders. Nor can they set their pay.

It’s ironic because the amendment was meant to block the members from hiking their own salaries before an election.

It dates back to the late 1700s, though wasn’t ratified, and thus not part of the Constitution, until 1992.

And what’s happening now in Washington doesn’t sit well with some of the members themselves.

“That is disgraceful, in my view, Rep. Tulsi Gabbard, a Hawaii Democrat, told CNN.

“Basically the only people who get paid in a shutdown are members of Congress, and that is irresponsible,” she added, saying she’s going to give back the money.

And she’s not alone.

About 65 lawmakers from both parties say they’ll either donate the money to charity or refuse to be paid during the shutdown.

Rep. Suzan DelBene, a Washington Democrat, for example, issued a statement yesterday pledging to pay back the money.

“For as long as this unnecessary shutdown occurs, hundreds of thousands of public servants will be working without pay,” Ms. DelBene said.

“When sequestration began earlier this year, I returned 8.2 per cent of my salary back to the Treasury, and for the duration of this shutdown, I will return the remainder of my personal salary as well.”

(Speaker John Boehner, the Ohio Republican who is one of the main players in this drama, earns almost $225,000.)

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