Carney on commodities: ‘wrong conclusions … could do a lot of damage’ – by James Munson ( – Septmeber 19, 2012)

iPolitics’ James Munson interviewed Bank of Canada Governor Mark Carney to get his thoughts on Canada’s role in the global commodities supercycle this past Friday. Here in Part 1, he explains his view that the resource boom is “unambiguously good” for Canada. Tomorrow, in Part 2, Carney explains the supercycle as part of a larger global economic restructuring. And on Friday, he’ll describe the policy and investments options Canada has at its disposal to best take advantage of high commodity prices.

Mark Carney doesn’t think Canada has any control over the resource boom.

The 47-year-old governor of the Bank of Canada, sitting beneath the portraits of his predecessors in the bank’s stately Graham Towers boardroom, says that as China and other emerging economies have fuelled a sustained rush for resources, sometimes called a commodities supercycle, they have redrawn the fortunes of developed countries like Canada.

The supercycle has spurred a massive expansion of the country’s biggest commodity export in the Albertan oilsands, triggered the deregulation of federal environmental assessments, made mining projects in the country’s northern regions viable and – at least according to the official opposition – contributed to the decline of the manufacturing sector.

As politicians have wrestled with this historic new force in the Canadian economy, misunderstandings about its root causes have developed and, left unchallenged, these could prompt bad policy choices.

“If you draw the wrong conclusions from it, you could do a lot of damage,” said Carney.

That possibility has forced Carney – under the bank’s mandate to study and explain risk to Canada’s well being – to weigh in on what he and his team of experts believe is really going on.

Dutch Disease

As the spring parliamentary session drew to a close, NDP leader Thomas Mulcair brought the partisan divide over resources to a fever pitch when he claimed Canada suffers from Dutch Disease.

Mulcair’s endorsement of the economic theory, which holds that increased commodity exports bring about a higher currency and make it harder for manufacturers to export, drew jeers from the government benches, who said the Quebec politician was calling the West’s most lucrative business an illness.

The theory is politically expedient because it assumes a simply zero-sum relationship between the resource sector and manufacturers that anyone can understand – we either build factories or dig mines.

With some of the best minds and tools at his disposal, Carney and the bank dug in and sought out the deeper complexity behind the rise of the resource sector.

“We didn’t just sit there and draw a line,” Carney said. “We used a major macro model of which there is no analog in this country and virtually no analog in the world which ran those simulations.”

The result was an analysis presented in the “Dutch Disease” speech, which Carney delivered at an annual meeting of global business people at the Spruce Meadows equestrian club southwest of Calgary on September 7.

“Unambiguously good”

The speech makes mincemeat out of the Dutch Disease caricature, though it arguably paints a more dire situation than the one expounded by Mulcair.

It takes its cue primarily from the global economic outlook – a stagnant U.S., a fumbling Europe and the emerging economies that are leading growth.

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