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Most Canadians are probably more familiar with Dutch elm disease than the similarly named “Dutch disease,” so when NDP leader Thomas Mulcair diagnosed Canada’s economy as suffering from the ailment it made headlines. According to Mr. Mulcair, “In six years since the Conservatives have arrived, we’ve lost 500,000 good-paying manufacturing jobs” because of a high petro-dollar. But is his diagnosis correct?
Dutch disease describes an ailment that the Netherlands contracted in the 1960s, when its broad economy faltered as it became a major exporter of natural gas. The currency became overvalued and the economy suffered from deindustrialization directly linked to the loss of exports and an increase in cheaper imports. Since then, the phenomenon has been discovered in other petroleumbased economies, such as Venezuela and several West African nations.
A superficial comparison of the Canadian economy and Dutch-diseased economies does show similarities, but not a more substantive look focusing on Dutch disease’s two major components: a high currency caused by an increase in natural resource exports and a directly linked decline in manufacturing.
The argument that the Canadian dollar rose solely because of resource prices is backed by little academic literature. We do know that between 2002 and 2008, Canada’s dollar rose as did commodity prices, but internal factors including a strong fiscal and monetary foundation, rising domestic demand, and rising exports to the United States contributed to the value of our dollar.
In 2008, resource prices plummeted but the Canadian dollar remained high, further illustrating that the dollar’s value stems from a complex set of internal and external factors, not simply the oil price. Since 2008, the dollar has remained high because of a strong fiscal foundation that helped us avoid the worst of the banking and credit crisis, while deteriorating economies and currencies around the world gave the Canadian dollar safe-haven status.
As for the view that the rising currency should cause a decline in employment in the manufacturing sector, two questions arise: Has the economy declined because of the value of the dollar? And is it linked to the high commodity prices?
Doubtless, some industries have been negatively affected by the high dollar. Using the economic concept of price elasticity of demand – how much a price can be increased before it lowers demand – shows that some industries are affected more than others.
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