Sick as a European economy

Sick as a European economy
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During the late 1970s and early 1980s, the Kingdom of the Netherlands underwent a stark economic slump that was so profound economists named a whole syndrome after it. This “Dutch Disease,” as it was known, was blamed on a perfect storm of two equally troubling factors: first, a currency whose value wouldn’t stop rising, and second, a manufacturing sector in terminal decline. This weird combination of good and bad was said to be largely attributable to a third variable, the dramatic rise of Holland’s petroleum sector that occurred around the same time.

The 1970s, as we may recall, were a good time for oil prices, what with all the Arab embargos and whatnot. As a new exporter on the block, Holland was thus well-positioned to see international demand for its currency suddenly jump, as everyone suddenly needed lots of Dutch guilders to buy up all the expensive Dutch oil. For firms like Royal Dutch Shell, it was a true golden age.

Yet this had the unfortunate side-effect of making everything else the country produced more expensive, as well. And since Holland’s other export products, such as, I dunno, wooden shoes, or whatever, were not nearly as important or rare as oil, the Dutch manufacturing sector became less and less attractive to foreign buyers, and fell into a decline from which it has never recovered.

A popular theory in Canada at the moment is that our country is now suffering from its very own manifestation of Dutch Disease. Promoted mostly by eastern Canadian politicians and economists — including the premiers of Ontario and Quebec — the theory holds that since petroleum prices and demand for Canadian oil are currently at such record highs, the Canadian dollar, like the Dutch guilder before it, has seen its value rise to an unnaturally inflated level. This, in turn, has made everything else Canada makes prohibitively more expensive and unattractive on the export market, with the country’s eastern-based manufacturing sector becoming the inevitable casualty.

If one subscribes to this analysis, this means that curbing oil expansion in the western provinces of Canada is in eastern Canada’s best economic interests, completely independent of any hippie-dippy environmental concerns about pollution or global warming. If fewer oil exports mean a more in-demand and competitive manufacturing sector, then Ontarians and Quebecers would be nuts not to actively seek that outcome. Or, as Premier McGuinty famously quipped earlier this week, “if I had my preferences as to whether we had a rapidly growing oil and gas sector in the West or a lower dollar, I’ll tell you where I stand: with the lower dollar.”

“Dutch Disease” syndrome is an attractive sort of populist economic argument in a country with as much regional tension as Canada, where the conventional mythology holds that one set of Canadians can only ever become rich at the expense of another. For some time now, the eastern provinces of Quebec and Ontario have seen their economies steadily decline, after all, with ever-rising rates of debt, deficit, and unemployment at precisely the same the western provinces, namely Alberta and Saskatchewan, have prospered. Unemployment in Alberta, for instance, is literally half that of Ontario and Quebec, 4% to 8%, according to Stats Can, and if you’re a politician responsible for presiding over the latter number, it’s very natural to want to blame the mess on external factors beyond your control, like the international oil and currency markets.

Trouble is, the argument is not terribly economically literate. To suggest that the woes of the eastern Canadian manufacturing sector, or eastern economic malaise in general, can be solely attributed to a single external variable is to greatly condense and selectively interpret several decades of Canadian economic change under a single myopic narrative.

Everyone knows, for example, that Canada (like basically all first world nations) has been at a marked competitive disadvantage in the business of making things ever since the rise of third world manufacturing superpowers like India and China in the 1980s and 90s. The decline of US manufacturing, particularly auto manufacturing, during the so-called “Great Recession” of 2008-09 likewise hit eastern Canada hard, since Canada’s supposed domestic auto industry is really just a “branch plant” of the big American firms, and thus heavily subject to the pressures of the US economic climate. We also know, for what it’s worth, that Ontario and Quebec have been two of the worst-managed provinces of Canada in recent years, racking up Greek and Californian levels of debt through the traditional scams of over-promising, over-spending, and under-taxing — and hoping someone else will clean up the mess later. An inflated currency might exacerbate all of these problems, but the roots clearly go much deeper.

As Prime Minister Harper never ceases to remind, Canada has weathered the sour global economic climate better than many other nations, but in a federal country like Canada, positive national data can often mask troubling phenomena unfolding at the local level. Particularly when we consider the uneven rate at which Canadians are actually experiencing this supposed era of stability, Canada’s economic position begins to look a bit more murky, and its long-term forecast of prosperity a bit more uncertain.

“Dutch Disease” may very well be an ignorant analysis, and certainly many observers have been quick to detail the ways in which a high “petro-dollar” is even helping the east more than hurting it. Yet the fact that the east has devised an attractive pseudo-scientific theory of regional victimization to explain away its economic woes may ultimately be far more significant than the specifics of the theory itself.

East-west tension is a deep well from which many vibrant political careers have long sustained themselves in this country. At a time when the regimes of premiers McGuinty and Charest have never been more under seige, it’s not surprising that these governments have been particularly eager to take a drink.




^ 37 Comments...

  1. lukev

    the conventional mythology holds that one set of Canadians can only ever become rich at the expense of another.

    Ya think? What other country has terms like "have-not province" in the general lexicon?

  2. ThePsudo

    There's a narrative in US leftist circles that says red states are financially subsidized by tax revenue from blue states. That's similar in principle to the "have not province" idea.

  3. drs

    There’s also http://en.wikipedia.org/wiki/Resource_curse

    And I don’t think it’s pseudo-science at all. Yeah, First World manufacturing has been hit, but having your currency rise 50% really does not help. And First World manufacturing isn’t universally hit, we still make lots of stuff, especially advanced stuff, even without looking at the powerhouse of Germany.

    Conflict between resource export and manufacturing is old and widespread; it was one of the tensions in the US before the Civil War. Cotton-exporting South wanted free trade to enjoy the strong dollar, the North wanted high tariffs to protect its growth from that dollar.

    The oil boom may make Alberta, and even Canadians via the dollar, *richer* in the short term, but the hollowing out of manufacturing jobs and shift to oil will make Canada less wealthy in terms of a diversified and healthy economy, like Iran having to import gasoline, or 19th century Argentina being as rich as the US until beef prices fell. Pin your star to a single export, and you can watch your star fall when times change. A diverse economy is a lot more secure.

    There are ways of coping and buffering one’s economy, like Norway.

  4. Jake

    More money from oil? Then cut your taxes and deregulate. Just the tax cuts alone will grow your economy. Control your spending some what and the revenue from oil will replace any lost revenue in cutting taxes (if you lean left) and if you lean right then cutting taxes and controlling spending is the way to grow the economy anyway. Thus no problem here.

  5. Nicolasrll

    What's the rationale behind deregulation?

  6. ThePsudo

    The rationale is "If rules make you go out of your way to follow them, they cost money. Thus, every rule has an economic cost. If the economic damage the rule prevents is less than the economic cost of compliance to it, the rule hurts the economy. Most regulations were passed based on discussions of the damage to be prevented without consideration the cost of compliance, so most regulations are worse for the economy than they were expected to be."

  7. Nicolasrll

    If you want to make that argument you need to be able to show, on a case by case basis, that it's indeed true that a given regulatory rule hurts the economy more than it helps it. Saying "just deregulate" doesn't seem very pragmatic to me.

  8. ThePsudo

    I agree. It's a general criticism against regulation, but it doesn't declare every possible regulation invalid on principle. It merely subjects them all to case-by-case review.

  9. Cutewood

    You should watch this movie. http://en.wikipedia.org/wiki/Inside_Job_(film)

  10. ThePsudo

    I might; it looks interesting. But I won't mistake documentary with research. Not after The Corporation, The Great Global Warming Swindle, and Loose Change were all such slop buckets.

  11. JonasB

    I wouldn't exactly call the Canadian dollar "unnaturally inflated". It's been hovering around 0.98 US for a while now.

  12. lukev

    you're assuming it belongs at parity with USD.

  13. PTBO

    I find it strange, JJ, that you are saying the Dutch Disease problem Canada has is something promoted solely by Eastern politicians. It’s a sad fact that I have to point out that there are parts of British Columbia outside of the lower mainland bubble. You appreciate how vital and massive our province's lumber and pulp manufacturing industry really is. Nobody is saying that problems with BC manufacturing (and Ontario and Quebec) are due solely to the Dutch Disease symptoms such as a high dollar. But it certainly is not helping.

  14. J.J. McCullough

    I don't actually think it's that massive anymore. Last time I checked, only around 5% of BC's GDP comes from forestry.

  15. PTBO

    Also I should add that the "first world manufacturing" problem you mention is solely due to the advent of free trade and increased globalization. The easier it is to move capital, the easier it is move your capital to areas where labour is cheapest.

    Since a capitalist's wealth is rooted in the ability to pay labour for only a part of the wealth they created- these increases the
    pace of capital accumulation and helps to achieve the 3% compound growth the capitalism requires so desperately to survive. Obviously we will have to abandon capitalism at some point in the future because infinite growth on a finite world breaks several important laws of physics.

    But I digress… A low Canadian dollar in the 90s was vital is shielding our industries from NAFTA but now with a high Canadian dollar we begin to see NAFTA for the monster that it truly is.

  16. spaaaaaaaaaaaaaaan

    …who says capitalism needs 3% compound growth to survive? Japan didn't have 3% growth for almost two decades (the years between 1992 until 2010) and capitalism has survived there.

    May I recommend doing a bit more empirical study before you make those kinds of assertions.

    (Source: http://data.worldbank.org/country/japan)

  17. PTBO

    Though I must add that I agree with your portrayal of Canada becoming Greece. The Drummond Report was not allowed to look at ways to increase revenue rather had to focus on spending cuts (which are a great way to contract the economy). Greece had very low government revenues so the current cross-party focus on tax cutting is just making us closer to Greece because of our decreasing government revenues- we would not have had a deficit had the GST not been cut.

  18. PTBO

    The other reason I agree with you is looking at the other problem European economies. Now obviously their spending was sustainable (surpluses in Spain, good deficit ratios in Italy, etc) but they are feeling the effects of a housing bubble bursting. Canada is totally hooped in this regard. The CMHC has reached its loan ceiling of 600 billion (very quickly), home prices are going to start crashing with simple demographics, higher interest rates, and tighter CMHC lending regulations. The Tories have totally mismanaged the housing market with the use of taxpayer backed loans to fuel a subprime lending industry. You know you can buy a 400,000 home with a 1000 dollars down? Madness.

    Add least you are a bit more anchored in reality then other Conservatives who go around repeating Harper's fantasy world view that our is doing (relatively) just hunky dory. It’s going to be a rough ride so hold onto to your seat.

  19. PTBO

    For a more naunced view on measures requires to combat the Dutch Disease that is affecting ALL of Canada –
    http://www.progressive-economics.ca/2012/03/04/wh

  20. ThePsudo

    Out of curiosity, what does PTBO stand for?

  21. PTBO

    PTBO=PeTerBOrough- an nice town in Ontario where I spent a small part of my life. The town reeks of freshly baked oatmeal cookies due the Quaker plant- much better then a pulp mill.

  22. @Kisai

    Hmm, the impression I was getting is that investors are having a hard time finding places to park their money because they get effectively negative returns in USD, and the two classic choices (Yen and Swiss Franc) have been nerfed by central bank intervention.

    What happens with the Canadian dollar is that it's a "Petro dollar" or "Resource dollar", which moves up and down with resource output. Foreigners are buying our dollar because it has a higher return than the USD. Listen to the business news and you hear "Short Euro/Long Canadian Dollar" mentioned by someone eventually. http://www.pfgbest.com/services/research/blogs/cu… : A massive 546.15% increase from 2184 to 14,112 contracts net long of the Canadian dollar;

  23. Matthew Steele

    If I can ask…

    I get why they're not dutch, but why are they Turkish?

  24. Gray

    I think he may have been shooting for Greece (hence the columns in the background).

  25. Ben

    Best dutch manufacturing;
    Dutch flags.

    When they flood the market and stop selling, they cut'em in half, turn them sideways and sell'em to France

  26. PTBO

    Robyn Allen's take on the McGuinty-Redford exchange. Allen is an economist and former CEO of the ICBC. She is anything but an 'Eastern politician".
    http://thetyee.ca/Opinion/2012/03/06/McGuinty-Dut

  27. guest

    We have the same issues here in Australia.
    The mining states are continuingly strongly, the 'rust-belt' states are struggling.
    Our dollar has increased in value dramatically which hurts not just manufacuring but agriculture as well.
    And then the more populous rust-belt states gouge the resource-rich states through the tax system.
    It really has created a two-tier system where mining and mining related areas do well and everyone else has to deal with increased unemployment and rising costs of many items including housing.

  28. Lolita

    Sometimes, blogging is a bit tiresome specially if you need to update more topics.:,-;�

  29. Education King

    I am more of the opinion that this analysis is even micrscopic in its cover up. I mean you should not see europe independent of international influences and specially other economical disasters of the entire world that is obviuos to effect europe.

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  31. sara

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  34. Marc

    I am more of the opinion that this analysis is even micrscopic in its cover up. I love the karikatur

  35. Stainim

    Conflict between resource export and manufacturing is old and widespread; it was one of the tensions in the US before the Civil War. Cotton-exporting South wanted free trade to enjoy the strong dollar, the North wanted high tariffs to protect its growth from that dollar.

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  37. Roesone Craft

    A diverse economy is a lot more secure.