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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.
For the rest of this article, please go to the Globe and Mail website: http://www.theglobeandmail.com/report-on-business/economy/manufacturing/is-canada-grappling-with-dutch-disease/article2433816/