September 22, 2012
Robson: Carney's common sense adds up
By John Robson, Parliamentary Bureau
NDP Leader Thomas Mulcair doesn't think Mark Carney was talking to him when the Bank of Canada governor publicly denied that a booming oil industry hurts Canada by driving up the dollar, depressing manufacturing exports and hollowing out our economy. Mulcair should listen anyway because, unlike most political chatter, Carney's critique of the "Dutch disease" theory is thoughtful and well-informed.
It's also very much Carney's business because the Bank of Canada is in charge of Canada's money supply. And while some people think the Bank's only real job is to prevent inflation, and others want it to pump up the economy by injecting "liquidity," there are also people who insist it should manipulate the value of the dollar in pursuit of prosperity.
Carney doesn't agree. On Aug. 22, in the Canadian Auto Workers annual conference lion's den, he said a high dollar was hurting manufacturing exports but "is not the most important reason. Over the past decade, our poor export performance has been explained two-thirds by market structure and one-third by competitiveness. Of the latter, about two-thirds is the currency while the rest is labour costs and productivity. So, net, our strong currency explains only about 20% of our poor export performance."
Econometrics may not impress auto workers any more than it impresses me. But Carney has common sense reasons for believing this math.
In a Sept. 7 talk to the Spruce Meadows Round Table in Calgary, frankly titled "Dutch Disease", he began with a lucid and fair assessment of his opponents' case: that "record-high commodity prices have led to an appreciation of Canada's exchange rate, which, in turn, is crowding out trade-sensitive sectors, particularly manufacturing. The disease is the notion that an ephemeral boom in one sector causes permanent losses in others, in a dynamic that is net harmful for the Canadian economy." But, he argued, the international and historical context makes it unlikely a high dollar is the problem.
For one thing, he said, slow growth in the U.S. and Europe is hurting sales to these traditional markets. For another, the decline of manufacturing in Canada, while dramatic, is part of a broad international phenomenon of goods production moving to newly industrializing countries.
Indeed, "In 1970, Canada's manufacturing-to-GDP ratio was 6 percentage points below the average of members of the Organization for Economic Co-operation and Development (OECD). Today, it is 3 percentage points behind. Likewise, the share of jobs in manufacturing has declined, but not as steeply as it has in our commodity-importing neighbour to the south."
And if the problem is worse in countries without our lucrative oil exports, they can't be causing it.
Furthermore, Carney said, a high dollar may hurt manufacturing exports. But it makes it cheaper to import equipment that improves productivity, spelling higher pay and more job security at home. And Canadian oil producers also buy manufactured goods including some that might otherwise have been sold abroad.
"For example, as of November 2011, 255 Ontario firms were suppliers to the Canadian oilsands. As well, Ontario's exports of mining-related services to Alberta grew 44% in the last year measured."
Having disposed of Mulcair's diagnosis, Carney went on to demolish his prescription. First, our dollar has been rising against the U.S. greenback for several reasons, including better tax and deficit policy. It would be insane to sacrifice these for a little temporary currency manipulation.
Second, deliberately pushing down a rising currency has significant domestic costs. "Our floating exchange rate helps to achieve the appropriate adjustments without forcing very difficult changes in the overall levels of wages, output and prices." Which is banker-speak for: You have to choke off exports, drive away investment or turn inflation loose.
At the end, the kid gloves came off. "The logic of Dutch disease requires that we undo our successes in order to depreciate our currency. Taken to its natural conclusion, this logic dictates that we shut down the oilsands, abandon our resource wealth, have high and variable inflation, run large fiscal deficits and diminish our financial sector. Such actions would surely weaken the Canadian dollar, but they would also weaken Canada."
Mulcair should thank Carney for saving him from a serious error.