The Dutch disease debate

Two weeks after he made a diagnosis of Dutch disease, Thomas Mulcair is dismissing the premiers of Alberta, Saskatchewan and British Columbia and Alison Redford is tweeting her disappointment in Mr. Mulcair. As to the central economic question, the Institute for Research on Public Policy has a new report.

The results are more nuanced than conventional wisdom would suggest. Only 25 of the 80 industries (accounting for about one-quarter of total manufacturing output) show a significant negative relationship between the US-Canada exchange rate and output. The effects are most pronounced in small labour-intensive industries such as textiles and apparel. Larger industry groups such as food products, metals and machinery are much less adversely affected by the strong dollar, and these minor problems have generally been offset by strong growth in demand. Interestingly, automotive industries do not show symptoms of the Dutch disease; their weakness stems from cyclical changes in demand and lagging productivity growth.

On balance, the evidence indicates that Canada suffers from a mild case of the Dutch disease, which warrants a commensurate policy response. It is difficult to implement national policies to directly counteract the rising exchange rate (policies such as investing resource revenues in foreign assets, as Norway does), because resource revenues are under provincial jurisdiction. However, Ottawa can use additional federal tax revenues stemming from natural resource booms to invest in infrastructural and other activities that bolster the competitiveness of the manufacturing sector as a whole.

See previously: The Dutch, oil and Thomas Mulcair




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The Dutch disease debate

  1. Over in Ontario, Hudak is pretending that a rise in some electricity rates is wreaking havoc. Imagine the ACTUAL harm that would result to a province even 25 of 80 industries suffered harm from a rising dollar.

  2. The IRPP is a right-wing think tank. So, its quick defense of Alberta and the energy sector is expected.

  3. Canada does indeed have a mild case of Dutch Disese. And
    since 8 of our 10 provinces are pre-industrial, it’s politically predictable
    that their premiers would freak out at the notion.

    There are, however, other factors involved…..China, off-shoring generally and
    business inertia.

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