# Do you buy the "Dutch Disease" argument?



## Spidey (May 11, 2009)

Recently politicians such as Thomas Mulcair and Dalton McGuinty have been blaming our petroleum industry for a high Canadian dollar and the decline of our manufacturing industry. In other words, other parts of the country are "paying the price for the prosperity of the natural resource sectors such as oilsands in Alberta". 

http://www.vancouversun.com/busines...ing+western+front+oilsands/6588191/story.html

Mulcair's stance is incredibly popular in some parts of the country -- for example, I occasionally listen to Quebec radio stations and they just "eat this stuff up". Which strikes me as a little ironic considering that Quebec is one of the provinces that benefits the most from transfer payments. However, there is a contingent in Ontario where this sentiment is also very strong.

It seems to be that Mulcair's objective is a lower Canadian dollar. In your opinion, this the way to prosperity? 

And whether a lower currency would achieve the desired affect is highly questionable as economists note that manufacturing has been declining at a similar pace in all western economies, regardless of whether they have natural resources or a strong currency. 

Personally, I think that transfer payments from provinces such as Alberta are improving our living standard and the jobs provided are benefiting Canadians across the country. If there is any truth to the "Dutch Disease" argument I think it is to the extent that countries with a relatively strong economy and balance sheet tend to have a stronger currency. But what would be the alternative to that?

Comments? Opinions? 

P.S. The intention is to focus on the validity of the "Dutch-disease" question and not get into a massive global-warming debate.


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## carverman (Nov 8, 2010)

Spidey said:


> Recently politicians such as Thomas Mulcair and Dalton McGuinty have been blaming our petroleum industry for a high Canadian dollar and the decline of our manufacturing industry. In other words, other parts of the country are "paying the price for the prosperity of the natural resource sectors such as oilsands in Alberta".


What do they know? Ottawa has been plagued with Dutch (elm) disease for many years now, and nothing has changed. :biggrin:



> It seems to be that Mulcair's objective is a lower Canadian dollar. In your opinion, this the way to prosperity?


He's the main NDP mouthpiece and has to take a stand on some kind of issue, I suppose. The auto union leader had already voiced
his opinion a few weeks ago that the value of the dollar should be lowered, as if that is going to help the auto union's current
problems and make our products more competive.. ok...where? 

Since Mulcair knows nothing about the tar sands industry, only what he reads or sees in the media, he thinks that because of continued development there, that leads to a stronger dollar because of Alberta's (and Canada's) oil exports. 

Yes, I'm sure that performance of our dollar is now based on the "new" oil standard (world price of a bbl of oil).
However, to attack the western provinces because they are doing what is best for their economies and creating jobs is not the way to go about it. Iif he keeps up this platform/soapbox, he will assure the NDP that he will go down in crushing defeat on the next election, similar to "Iggy." As if the western provinces give a hoot about what is happening in Ottawa. 

Devaluing the dollar is not a solution now to being more competive..years ago when the US was our main trading partner, maybe, but now with a global economy, a strong currency may be an advantage to stop hyperinflation...IMO.


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## andrewf (Mar 1, 2010)

To answer the question, yes Dutch Disease is real phenomenon and is happening in Canada. But the cure (shutting down the oil industry) is worse than the disease.

What Alberta should be doing is following the example of Norway by saving their oil royalties. They are keeping their economy white hot at a time when the rest of the country is sluggish at best. By spending their oil royalties in the year they recover them, they are pouring gas on a fire, and spending the natural resource endowment of the province rather than saving it for the benefit of future generations. If they saved the oil royalties and invested in broad international equities and debt (like Norway), the outflow of currency would help moderate the Canadian dollar. They would also have a tax regime more in step with the rest of the country, as they would have to fund their current social spending out ofthe same revenue stream as the rest of the provinces.


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## HaroldCrump (Jun 10, 2009)

As far as Dalton McGuinty goes - his attack against the strength of the Canadian Dollar has more to do with his own utter incompetence and fiscal mismanagement of the province of Ontario.
The CAD may be 60 c. to the USD and he still couldn't manage his provincial economy.

As for Thomas Mulcair - how exactly does he plan to devalue the Canadian Dollar, short of passing legislation to shut down the energy and mining industry across the country?
What does he propose the central bank should do to devalue the CAD?
Lower interest rates to *-*1.50% perhaps.
Or maybe print several Trillion $ and sell in the open market?

Do either of them realize the economic consequences of such actions?
And the socio-economic consequences of shutting down the energy sector or reducing their global competitiveness (Canadian oil is anyway deeply discounted).

If they are concerned about global competitiveness of the manufacturing sector, perhaps they should instead focus on the labor structures in these two provinces.


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## LondonHomes (Dec 29, 2010)

The Dutch Disease is certainly impacting Ontario. I know of several plants locally that had a cost advantage over US plants within the same company, when the CDN dollar was weaker so they got a lots of work. With a stronger CDN $ a lot of that work has been transferred back to the US since the CDN $ savings don't make up for the added freight costs any more.

I think a lower CDN $ help in the short term, however it's not a long term solution.

However, if you compare Ontario to Michigan or other North Eastern US states with a similar economic footprint Ontario is doing better.


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## Sampson (Apr 3, 2009)

If the CAD was devalued, then there would be a similar/equivalent negative impact on other economic sectors, so essentially you could stem job loss in one sector at the cost of a different one. Instead of a West-East tilt to the economy, there would a an East-West tilt. What overall benefit does that have on the Canadian economy?


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## mrPPincer (Nov 21, 2011)

Sampson said:


> If the CAD was devalued, then there would be a similar/equivalent negative impact on other economic sectors, so essentially you could stem job loss in one sector at the cost of a different one. Instead of a West-East tilt to the economy, there would a an East-West tilt. What overall benefit does that have on the Canadian economy?


That's an interesting and valid point but I think the tilt would be north/south rather than east/west.
A lower valued CDN dollar would help the raw export industry as well.

What would be ideal of course is if our manufacturing industries are strong enough to compete even with a high dollar.
Things like a good health-care system here at least help give us a bit of a competitive edge vs similar companies down south which would possibly have to offer that to it's employees separately.


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## Sampson (Apr 3, 2009)

mrPPincer said:


> What would be ideal of course is if our manufacturing industries are strong enough to compete even with a high dollar.


This is the sad reality of why this industry is failing. Canada is not a World leader in any manufacturing process, not in many high-tech fields. There is no way to prevent manufacturing from going to cheaper countries, or more relevant to Canada, to automation. Unless we are producing superior, World-leading products, this industry is doomed to fail.


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## CanadianCapitalist (Mar 31, 2009)

Globe & Mail column related to this discussion:

Is Canada grappling with Dutch Disease?



> 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.​


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## Spidey (May 11, 2009)

Personally, I don't see how Mulcair could make such a miss-step at a time when he seemed poised to capture much of the political middle-ground. While these types of views are extremely popular in Quebec, I'm not sure they sit well in the rest of the country, even in Ontario. After all, fairly Liberal sympathetic columnists such as Andrew Coyne have been quite critical of McGuinty's petro-dollar complaints. And I'm sure many union-workers either directly or indirectly rely on the energy sector for employment. 

If the "petro-dollar" is such a problem, it leads to the obvious assumptions that Mulcair would like to see a devalued dollar, regression of oil-sands development or a combination of the two. To help justify this position, Mulcair's latest charge is that oil-sands profits are vastly over-stated which leaves the implication that reducing their production would have minimal financial impact. However, the transfer payments from Alberta seem to speak for themselves. 

IMO Mulcair could have occupied much safer ground by promoting cleaner oil exploration without getting into seemingly blaming the West for the East's woes. On a somewhat unrelated note, Mulcair (or Rae for that matter) could be making much better traction by looking at some specific cuts currently taking place amongst Federal government employees - particularly those that could impact health or safety.


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## andrewf (Mar 1, 2010)

Coyne is a conservative, if not a Conservative partisan.


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## Spidey (May 11, 2009)

andrewf said:


> Coyne is a conservative, if not a Conservative partisan.


He is no fan of Harper and voted Liberal last election. 

http://www2.macleans.ca/2011/04/28/a-price-must-be-paid-but-by-whom/

I will agree that he has some fairly fiscally conservative views, but so do many Liberal supporters. That generally is my point, regarding the potential danger in McGuinty's and Mulcair's comments.


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## HaroldCrump (Jun 10, 2009)

All the "petro-dollar" rhetoric by McGuinty is nothing more than the whining of an incompetent and corrupt leader, who for nearly a decade now has been pandering the causes of big unions and special interest groups like teachers.
He couldn't fiscally manage the Ontario economy even if the CAD were 60c. to the USD.

As for Mulcair, he doesn't have the foggiest idea what he is asking for.
Does he understand the consequences if the federal govt. and the BoC were to follow an aggressive devaluation policy?
Currency manipulation is not a game of little kids soccer.


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## kcowan (Jul 1, 2010)

Any politico who claims we have "dutch disease" or french disease is trying to oversimplify issues for political gain. Best to ignore such rantings. The dollar will seek its own level sadly. Any attempt to influence it is doomed to failure.

If the BoC raises interest rates, the C$ will rise, and savers will be rewarded. But retailers and manufacturers will scream.


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## fraser (May 15, 2010)

If Mr. Mulclair was truly serious about the loss of manufacturing jobs in Ontario and Quebec he would start with the lower productivity rates in Canada vis a vis the US. This is a gap that needs to be addressed regardless of currency valuation.

Is the Canadian dollar strong? Or is the USD weak? A bit of both.

One thing is for sure, BC Premier Cristy Clark is loving Mulclair's comments. She anticipates that it will erode some of the provincial NDP support n BC.


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## HaroldCrump (Jun 10, 2009)

Mr. Mulclair is eyeing the O & G royalties - that is why he is there.
He wants to nationalize it, like he has heard Norway did.
After all, when he will become Prime Minister, he needs all that cash to pay for a long backlog of programs, subsidies, and lobby groups


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## Spidey (May 11, 2009)

I don't know the logistics or even to the extent it may already be happening, but I don't hear much about Ontario or Quebec manufacturing concentrating on servicing oil-sector needs - rigs, drills, pumps, machinery, mining vehicles and parts, pipeline materials, etc. Mind you perhaps such work wouldn't suit green initiatives so there may not be much government encouragement in that direction. :neglected:


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## Spidey (May 11, 2009)

HaroldCrump said:


> Mr. Mulclair is eyeing the O & G royalties - that is why he is there.
> He wants to nationalize it, like he has heard Norway did.
> After all, when he will become Prime Minister, he needs all that cash to pay for a long backlog of programs, subsidies, and lobby groups


I think you are right. However, I think he would face a strong risk of Alberta separating and possibly taking BC and Saskatchewan along with them. Then Ontario and Quebec would be free of the threat of that nasty "petro-dollar" (and all those transfer payments as well).


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## HaroldCrump (Jun 10, 2009)

Spidey said:


> I think you are right. However, I think he would face a strong risk of Alberta separating and possibly taking BC and Saskatchewan along with them. Then Ontario and Quebec would be free of the threat of that nasty "petro-dollar" (and all those transfer payments as well).


Of course, although, I doubt there is any real risk of separation.
What is far more likely is that he'll never get elected.
This is all a big PR exercise - pandering to his favorite support/lobby groups and re-assuring them.


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## kcowan (Jul 1, 2010)

Yes the western provinces are extremely loyal to Canada (except Quebec), so I can see them hanging in and fighting.


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## Rusty O'Toole (Feb 1, 2012)

It seems all political and economic thinking these days is based on the slick trick, the quick fix and the gimmick. No one ever thinks of making or building anything lasting or of genuine innovation or new business going forward. It's all about finagling a fast buck.

You can call it the Dutch Disease or the English Sickness or the Cranial-Rectal Inversion Syndrome. It all comes down to the same thing. As long as we act as if work is for suckers and the only thing that counts is to get something for nothing, we are doomed. Maybe not right away but you always run out of other people's money eventually.


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## Spidey (May 11, 2009)

Seems that Mark Carney doesn't buy the Dutch Disease argument. 


http://business.financialpost.com/2012/09/07/carney-squashes-dutch-disease-diagnosis/


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## andrewf (Mar 1, 2010)

It seems to me his argument is not that Dutch Disease isn't happening, but that the cure is worse than the disease. Oil is a net benefit to the country. I just wish Alberta would do a better job of saving their oil revenues. Blowing it all as soon as they get it is having distortionary effects. For instance, if they kept some of those revenues as foreign currency/foreign assets rather than repatriating it into Canadian dollars, the Canadian dollar might not be quite so overvalued. Long term fair value for the CAD is something like 85 cents US.

It's also an ethical argument. Alberta has a natural endowment that the current generation is claiming 100% for its own. They should be converting the natural endowment into a financial endowment, so that future generations of Albertans also enjoy some of that wealth. The way things are going, if and when the resource is exhausted or obsolete, all future Albertans will have to show for it is polluted land and water, and rusting industrial facilities.


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## Spidey (May 11, 2009)

I agree that some sort of endowment could be a worthy goal and I suspect it will happen if we pull ourselves out of the current global malaise. However, I think that the dynamics are different than in a relatively small, relatively homogeneous population such as Norway where a national-type endowment does not raise too many hackles. A national endowment would be hungrily eyed by eastern Canada and even a significant provincial endowment would probably create envy in Quebec and Ontario.


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## HaroldCrump (Jun 10, 2009)

andrewf said:


> It seems to me his argument is not that Dutch Disease isn't happening, but that the cure is worse than the disease.


Yes, indeed the cure is worse than the disease.
The "cure" that is being asked for is plain nuts.

Consciously destroying the value of the CAD just to please one specific most vocal lobby group is economic suicide.
And have these lunatics thought through the ramifications of devaluing the currency?
What that will do the energy prices and thus general price levels for all essential goods and services?
And what makes them think that there won't be any counter actions by other countries that get impacted by the depreciation of the CAD and the balance of power in manufacturing?

Let us also not ignore that the very group(s) that are drumming up this rhetoric around the "Dutch disease" and asking for all these policy changes were themselves guilty of those very things in the past.
The manufacturing sector, and esp. the auto lobby, enjoyed the benefits of a weak currency and very favorable govt. policy for decades.
Did they do any of those things that they now expect the oil/energy sector to do?
How many endowment funds or charities did they sponsor?

As for environmental concerns, this industry produced gas guzzling trucks and SUVs for decades and used their lobbying to prevent govt. investment into cleaner fuels, public transit, etc.

They need to take a long and hard look at themselves in the mirror before they throw stones at anyone else.



> all future Albertans will have to show for it is polluted land and water, and rusting industrial facilities.


Sounds like the current state of Ontario to me


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## Toronto.gal (Jan 8, 2010)

Mark Carney is so handsome! :love-struck:


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## Sampson (Apr 3, 2009)

HaroldCrump said:


> Yes, indeed the cure is worse than the disease.
> The "cure" that is being asked for is plain nuts.


Agreed.

Manufacturing in Canada as it exists must change. Even if the dollar was devalued a combination of automation and cheaper production in other countries has already killed the industry in Canada as it existed in the 20th Century.

Time to either begin specialization and increasing the complexity and standard of production (like Germany) or time to find a niche where Canadian innovation can result in us being the leaders in new technologies.

Building the same old crap that other countries are now able to do at similar levels is a path to doom.


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