Ontario Premier Dalton McGuinty has been reported as saying:
“[The high Canadian dollar]has knocked the wind out of Ontario exporters and manufacturing in particular… So if I had my preferences as to whether we had a rapidly growing oil and gas sector in the West or a lower dollar, I’ll tell you where I stand: with the lower dollar.”
There are several things wrong with this:
1. Exports are costs. The goal of international trade is to import goods and services; exports are the price we pay in return. If a higher exchange rate allows Ontario to import more and export less, Ontarians are better off.
2. A fallacy of composition. Bad news for one sector is not necessarily bad news for Ontario as a whole. Jobs lost in manufacturing were more than made up for by jobs created in other sectors.
3. Increased purchasing power. Since much of what we purchase is imported, a higher exchange rate means an increase in purchasing power. All Canadians -- including Ontarians -- benefited from real wage growth during the 2000s. Real wage growth during the resource-based expansion of the 2000s was stronger than it was during the manufacturing-based expansion of the 1990s. This increased buying power produced employment opportunities for firms serving the domestic market.
4. Lower interest rates. Everything else being equal, a higher exchange rate is the same thing as a monetary contraction: the lower prices produced by an appreciation keeps inflation in check. As long as the dollar was appreciating, the Bank of Canada could -- and did -- keep interest rates lower that they would have been if the dollar had not appreciated.
The resource boom and the exchange rate appreciation that went with it were good times for all provinces. This cannot have gone unnoticed by the Ontario government: personal income tax revenues grew on average by more than 9 per cent a year between 2003 and 2007 -- even as 150,000 manufacturing jobs were lost.
Even though the net effect of the resource boom on Ontario was positive, not everyone benefited, and Premier McGuinty’s government has an obligation to offer whatever support it can to those who lose their jobs in this transition.
But it also has an obligation to consider the interests of the vast majority of Ontarians who do not work in the manufacturing sector. For most Ontarians, the effects of a higher exchange rate and the increased purchasing power it brings are unambiguously positive.
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