So much for Dutch disease

Mulcair’s references to Dutch disease obscure his environmental criticisms of the oil patch
From the editors
So much for Dutch disease
Larry MacDougal/CP

Federal Opposition Leader Thomas Mulcair says he doesn’t regret bringing up the issue of whether Canada suffers from “Dutch disease.” He might be the only one. The newspapers have been so full of this phrase for the last few weeks that the very sight of it must make most of us want to grab and assault the first person we can find named Van Der Whatever.

It would be some comfort if the Dutch disease debate had been handled impeccably in the press, but it hasn’t been. Dutch disease is a theoretical phenomenon in economics that occurs when high prices for raw resources attract capital and labour away from advanced manufacturing, rebalancing an economy in a hard-to-reverse, welfare-diminishing way. If the resource boom is strong enough to jolt the currency upward, that’s a double whammy for the manufacturers, to the degree they are dependent upon exports.

But a resource boom only becomes a “disease” if the economy doesn’t react with equal efficiency when the resource runs out or the price declines, because the manufacturing sector has shrunk and its markets can’t be recaptured easily. The concern is that there are beneficial “spillover” effects of having advanced manufacturing that are more easily lost than recouped; if a country loses a computer-chip factory, for example, it might not be able to open it again later, because the closure discouraged young people from getting the kind of engineering education you need to make and market chips.

It’s important to realize that the Dutch disease story has three components, all of which must be present for the diagnosis: (1) a shift from a “lagging sector” to a “booming sector” that (2) is redoubled by a strong currency and (3) creates some long-term harm because the lagging sector cannot rebound readily. That third condition is the actual “disease” part. But even economists explicitly discussing Dutch disease don’t always get around to tackling part 3, and certainly Tom Mulcair and his defenders haven’t.

Last week, for example, when everybody ran gotcha headlines along the lines of “Harper government funded study on ‘Dutch disease,’ ” it was pretty clear that the study hadn’t been read carefully. The paper co-authored by Canadian economist Serge Coulombe is called, “Does the Canadian economy suffer from Dutch disease?” But its actual focus is only on the second part of the diagnosis: to what degree is the strong Canadian dollar encouraging a shift away from manufacturing?

Coulombe et al.’s finding was that even if you just focus on the exchange-rate effects—in other words, if you leave aside the huge globalization impacts that are hurting manufacturing most in the Western democracies—only about half the effect is attributable to the Canadian dollar as such. The rest results from the relative recent feebleness of the U.S. dollar, which is out of the hands of Canadian policy-makers.

The paper thus urges skepticism about Dutch disease in Canada. It also found that the harms inflicted on manufacturing by the strong Canadian dollar weren’t particular to advanced manufacturing. Textile mills were the hardest-hit sector of all. Producers of machinery and computers were affected by the strong loonie, but so were the plastics, rubber and paper businesses. A second study, published by the Institute for Research on Public Policy on May 16, arrives at similar conclusions.

One must sense, hearing of this finding, that talk of Canada’s oil and gas industry creating a Dutch disease is a combination of semantics and ignorance. On paper, Alberta synthetic crude is defined as “resource extraction.” A paper mill isn’t. In reality, jobs and capital flowing from paper mills to Syncrude is excellent news, if a sophisticated knowledge economy is what we want. The fast-growing parts of the oil patch—steam-assisted gravity drainage in the tar sands, hydraulic fracking in the Bakken formation—are creating nuclei of engineering know-how and demand for everything from chemists to environmental scientists.

If textile makers can’t keep up, that’s not Dutch disease; textile jobs aren’t jobs we want to protect for “spillover” reasons. But Mulcair wants us to imagine ultra-skilled workers from Ontario abandoning their accumulated knowledge and their humanity as they shuffle off to Alberta to lug pipe like brutalized automata. The accusation of regional prejudice is inescapable. (Moreover, poor Alberta continually pours billions into the federal equalization program, with added costs in inhibited labour mobility, so that other provinces get a break when times are good out west. Does this cash not cushion the effects of regional booms enough? What is Alberta paying for if not goodwill?)

Meanwhile, Mulcair’s references to Dutch disease obscure his environmental criticisms of the oil patch, which have no logical connection to currency issues or industrial strategy. On May 18 he told a scrum, “We’ll just keep coming back with what the real issue is. The real issue is polluter-pay.” If that’s the real issue, why not stick to it?