Does Canada have a bad case of "Dutch Disease" AKA "Resource Curse"? And, if so, what can be done about it?

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jerrym

The Organization for Economic Co-operation and Development (OECD), which collects data and does research on economic conditions in its 34 developed member states, concluded in a report that Canada is suffering from Dutch disease.

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The OECD is weighing in on the controversy surrounding whether Canada is suffering from an economic condition known as Dutch Disease, and its qualified answer is yes. The Organization for Economic Co-operation and Development warns in a report released Wednesday that the run-up in commodity prices is leading to an uneven economy in Canada.

And it says the country needs to do more to develop non-resource aspects of the economy so as to maintain high levels of employment and an equitable distribution of wealth across regions. ...

Resource-rich provinces such as Alberta, Saskatchewan and Newfoundland have prospered, while others have fallen behind, in part because a commodity boom has strengthened the Canadian dollar. ...

"I don't think you can really deny it," said Peter Jarrett, one of the report's author, in an interview. "You can't explain the entire pattern of the history of manufacturing just by exchange rates, that goes too far, but anyone who argues it has no effect is clearly not looking at the data.

The 128-page report from the multinational organization does not use the term Dutch Disease, but it traces the steep decline of manufacturing in Canada since the turn of the century and the equally sharp climb of the loonie. During the same period, demand and prices for Canadian commodities, particularly oil, also accelerated to record levels.

"The export-oriented manufacturing sector had by 2011 shrunk sharply to only 12.6 per cent of total value added, down from a peak of 18.6 per cent in 2000. Its share of employment has also fallen substantially over the past decade from 15.2 per cent to 10.2 per cent, and somewhat more than in the United States," it notes. "Both outcomes have been clearly correlated with exchange-rate developments." ...

The fact that Canadian manufacturing has fallen further and faster than the United States, where resources play a smaller role in the economy, can be partly explained due to exchange rate movements, Jarrett said. The analysis mirrors that of NDP Leader Thomas Mulcair, who has been accused of pitting regions against each other for political purposes. ...

Last month, the Pembina Institute said what it called "oilsands fever" spread benefits unevenly across the country and could be hiding economic turmoil down the road. ...

The OECD report says there's no question the decline in central Canada's manufacturing base is correlated to the appreciation in the dollar. ... The report does not call for a for a slowing down of resource development, particularly in Alberta's oilsands, although it continues to push for a carbon tax.

Instead, it advocates that Canada boost innovation and invest in churning out skilled workers. That will lead to higher productivity, which should benefit the non-resource sectors.

The OECD calls sluggish productivity growth "the main long-term challenge facing Canada's economy."

The report touches on a wide range of economic issues impacting Canada, including interest rates, debt, government fiscal health and immigration.

It gives the most space, however, to why Canada is unable to capitalize on its highly-educated human capital to commercialize ideas and innovate. The country's productivity has actually fallen since 2002, the OECD notes with alarm, while in the U.S. it has increased by 30 per cent over the past two decades.

This is apparently not a unique Canadian problem. Other resource-rich countries, like New Zealand and Norway also underperform when it comes to innovation, the report states.

Many of the solutions for the innovation deficiency advocated by the OECD have been advanced before, including that businesses spend more on research and development, and that governments devote resources to post-secondary schools that turn out highly-skilled workers.

But the report takes issue with some of changes to R&D funding proposed by Finance Minister Jim Flaherty in his March 29 budget. The report says Flaherty should have followed more closely the Jenkins report recommendations he commissioned by narrowing the tax credit gap between small and big companies, rather than increasing it, and by not being afraid to "pick winners" as long as firms also contribute to their own research.

On the current state of the economy, the OECD says Canada has weathered the global crisis comparatively well and should grow by about 2.2 per cent this year and 2.6 per cent in 2013.

But, as it has noted before, Canada faces a potential future risk over the high levels of household debt and real estate prices.

"Low interest rates are for now keeping mortgage and debt-servicing affordable for most, but the share of indebted households spending more than 40 per cent of their income on interest payments remains about the 2000-2010 average," it warns.

 

http://www.huffingtonpost.ca/2012/06/13/canada-dutch-disease-oecd-report...

 

 

 

jerrym

The following article, which is based on a report a fossil fuel research institute, describes the expected financial returns and growth of the industry until 2050. 

However, increasing production by a factor of 3.5 during this period not only leads to much greater greenhouse gas emissions, but further distorts the Canadian economy towards ever greater dependence on this one sector. While Alberta gains enormously in royalties, the resulting rising Canadian dollar has and will continue to damage the much more employment intensive manufactruing sector. In other words, we are facing a classic case of Dutch disease. 

 

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Alberta’s government will collect $1.2 trillion in royalties from the oil sands over the next 35 years, and emissions from oil and gas extraction are expected to triple during that time, a new report from an industry group says. ...

The Canadian Energy Research Institute projects that Alberta’s oil production will rise from 1.6 million barrels per day at present to 5.4 million barrels by 2045, and efforts to curtail greenhouse gases will have virtually no effect on emissions. ...

 

 

As oil sands profits and royalties grow, the economic gap between Alberta and the rest of Canada continues to expand. This can be most obviously seen in federal transfer payments, which equalize provincial revenue between “have” and “have-not” provinces.

Traditionally, Alberta and Ontario were “have” provinces that contributed more tax money than they received from the federal government. But today, with Ontario’s manufacturing sector slumping (some say because of the oil sands-linked “petro-dollar”) and oil prices above $100, Alberta and the other "energy" provinces -- British Columbia, Newfoundland and Saskatchewan -- have become "have" provinces, and Ontario is a net recipient of transfer payments -- $3.2 billion for 2012-2013.

Canadian economists have been warning for years that excess reliance on oil and gascould cause Canada to suffer from “Dutch Disease,” which occurs when a country’s currency rises in value as a result of an oil boom, making non-energy industries uncompetitive in the global economy, and “hollowing out” the country’s manufacturing and knowledge base. This phenomenon occurred in the Netherlands in the 1960s and 1970s, hence its name.

http://www.huffingtonpost.ca/2012/03/27/alberta-oil-sands-royalties-ceri...

 

 

jerrym

Furthemore, as the last post notes, while Canada pursues increasing its fossil fuel industry by a factor of 3.5 by 2050, the rest of the world has been rapidly shifting toward the renewable energy.

By 2010 global renewable energy spending surpassed global fossil fuel spending for the first time in history as noted in the following article.

 

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Renewable energy is surpassing fossil fuels for the first time in new power-plant investments, shaking off setbacks from the financial crisis and an impasse at the United Nations global warming talks.

Electricity from the wind, sun, waves and biomass drew $187 billion last year compared with $157 billion for natural gas, oil and coal, according to calculations by Bloomberg New Energy Finance using the latest data. Accelerating installations of solar- and wind-power plants led to lower equipment prices, making clean energy more competitive with coal. ...

“With current policies in place, global temperatures are set to increase 6 degrees Celsius, which has catastrophic implications,” IEA Chief Economist Fatih Birol said. “If as of 2017 there is not a start of a major wave of new and clean investments, the door to 2 degrees will be closed.”

http://www.bloomberg.com/news/2011-11-25/fossil-fuels-beaten-by-renewabl...

 

Annual global investment in renewable energy also increased from $6 billion in 1995 estimated to $17 billion worldwide in 2002 (http://www.martinot.info/Martinot_NAR.pdf) and then to $244 billion in 2012 (http://en.wikipedia.org/wiki/Renewable_energy_commercialization), an increase in renewable energy spending by a factor of 14.3 in 2002-2012 decade and by a factor of 40.7 between 1995 and 2012.

The Cons present and future focus on fossil fuel investment and production not only leaves the rest of the economy of suffering from Dutch disease and lower employment per dollar invested, it also risks leaving the country behind in a buggy whip industry as the world continues to shift toward renewable energy. 

 

In addition, renewable energy generates far more employment for the same amount of investment. 

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As compared to traditional fossil fuels, the renewable energy sector is relatively labor-intensive, requiring a larger number and wider variety of jobs in areas ranging from manufacturing, construction, and installation to ongoing operation and maintenance.

According to an analysis of 13 independent reports and studies of the clean energy industry by UC Berkeley’s Renewable and Appropriate Energy Laboratory (RAEL), renewable energy technologies create more jobs per average megawatt (MW) of power generated, and per dollar invested in construction, manufacturing, and installation when compared to coal or natural gas. Over the course of a 10-year period the solar industry creates 5.65 jobs per million dollars in investment, the wind energy industry 5.7 jobs, and the coal industry only 3.96.1 In the case of coal mining, wind and solar energy generate 40 percent more jobs per dollar invested.

http://greenforall.org/wordpress/wp-content/uploads/2012/10/job-creation...

 

jerrym

The effects of the Dutch disease on another natural resource-based economy provides further warning to Canadians about the risk Canada faces because of its focus on a fossil fuel boom.

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Australia was one of the few developed economies to emerge from the global recessionlargely unscathed. Growth has been good for a quarter of a century, public debt is low, the banking system proved resilient during thefinancial crisis and it is one of only a handful of countries that still retains a AAA credit rating.

Success initially was based on some important structural reforms to labour markets and to welfare policy, coupled with macro-economic policies that used inflation targeting to keep increases in the cost of living in check. Australia's banks were better capitalised than those in Europe or the US when the crisis broke.

These reforms in the late 1980s and early 1990s coincided with China's emergence as a global economic superpower. China needed raw materials – coal, iron ore, aluminium – for its rapid industrial expansion and Australia had them in abundance. China now takes 40% of Australian exports.

As a result, Australia was the Ireland of the antipodes. Both countries put in place supply-side reforms designed to boost growth and both had access to a huge market. ...

Before looking at why Australia could go the same way [as Ireland], it is worth looking at the way in which the global economy has evolved over the past five years. In the days before the financial crisis, there were three groups of countries. In the first category were the workshop nations, the ones that produced the cars, the clothes, the machine tools, the TV sets and the toys. Low-cost countries such as China fell into this category, but so did high-cost countries such as Germany.

In the second category were the debtor nations. These countries bought all the goods churned out by the workshop nations, running up big current account deficits in the process. The United States and the United Kingdom were prime examples of debtor nations: levels of private debt exploded to allow consumers to live beyond their means.

Finally, there were the resource-rich countries. Some of these were the oil-rich nations of the Middle East; others included Russia and two important developed countries – Canada and Australia. All these countries did nicely out of a global economy in which China was growing at 10% a year and the US was acting as the spender of last resort. In the four years before the sky fell in, global growth averaged around 5% a year – its strongest since the latter years of the post-war boom.

But this model has now collapsed and 5% global growth now looks like an aberration. In the US, growth is struggling to rise above 2% despite the extraordinary stimulus provided by the Federal Reserve.

Wall Street fully expects the Fed to start "tapering" its bond-buying under the quantitative easing programme next month, and that has already had an impact on some emerging countries – such as India. The notion that the US is easing back on electronic money creation has strengthened the dollar and sent the rupee down to a record low. That is unhelpful to policymakers in New Delhi battling against already strong inflationary pressures, since it makes imports dearer.

But if India is struggling to adjust to the new normal so too is China. With the US less willing to buy up everything Chinese factories produce, the new leadership in Beijing has worked out that it might not be sensible for investment to make up 50% of the nation's output. But the transition to an economy less dependent on investment and exports is likely to be slow and fitful. One thing is certain: the days when the emerging world was expanding at 9% a year, as those countries did at their peak in 2010, are now over. Neil Shearing at Capital Economics estimates that emerging economies are currently growing at an annual rate of 4%.

All this has obvious implications for those countries heavily dependent on exports of energy and raw materials, such as Australia, where the mining industry has doubled its share of national output to 10% in less than a decade. Exports relating to exploitation of natural resources account for 60% of the total and while the mining sector has growth by 7.5% over the past decade the rest of the Australian economy has expanded by around 2.5%.

Australia now bears all the hallmarks of a country where its industrial base has hollowed out. The decision by Ford Australia to close its manufacturing plants at Broadmeadows and Geelong is evidence of what economists call Dutch disease: a natural resource boom drives up the exchange rate and makes all other exports deeply uncompetitive.

With the outlook for the global economy far less rosy than it was, the mining sector is also cutting back on investment. That has left the economy propped up by the one remaining source of growth – an overvalued real estate market.

As the economist John Llewellyn has pointed out, household debt in Australia rose sharply in the 1990s and 2000s and now stands at 150% of GDP. Noting that the housing market may already be in bubble territory, he adds: "Depending on a strong pickup in housing as a means to sustain growth and rebalance the economy would therefore appear to be fraught with danger." ... 

The Reserve Bank of Australia is now cutting interest rates and talking down the currency in an attempt to rebalance the economy. That is easier said than done when your economy amounts to a large hole in the ground ringed by some expensive property. The risk is of a sudden Aussie collapse of the sort that has become all too familiar on English cricket grounds this summer.

http://www.theguardian.com/world/economics-blog/2013/aug/18/ashes-econom...

 

NorthReport

Another point of view on dutch disease

Norway proves oil-rich nations can be both green and prosperous

http://www.theglobeandmail.com/report-on-business/international-business...

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