Editor Pick: Not Dutch Disease, China Syndrome in Canada
After reaching 30-year highs in late July, the Canadian dollar has fallen back quite precipitously in recent days (about 3% to 92c yesterday) in the midst of concerns over exposure to US subprime mortages and related liquidity concerns concentrated in the domestic asset-backed commercial paper market (Coventree etc). But this recent fall (and today’s slight rebound) only highlights the significant appreciation in the past four years.
Ryan MacDonald of Statistics Canada has a new paper out on how Canada has adapted to the currency appreciation and shift in its terms of trade. This is largely the result of an increase in price and volume of resource (especially energy) exports.
Contrary to expectations, the paper finds that Canada is not in the throes of ‘Dutch disease.’ Rather, the empirical investigation suggests that the Canadian economy and labour market have proven themselves flexible enough to adjust to a higher commodity price and higher dollar environment. Moreover, although both the Netherlands and Canada experienced a currency appreciation in conjunction with a resource boom, the sources of the boom are distinctly different and are leading to different adjustment paths.
The integration of emerging nations, such as China, is accelerating the restructuring of the Canadian economy, which dates back several decades. Shifts in wages, prices, industrial structure and population are all being driven by the resource boom associated with rapid growth in Asia. …Despite the reallocation that has begun, employment levels are strong. Labour markets in all provinces have coped well with the transition. Moreover, the type of dislocation implicit in the very term ‘Dutch disease’ has not been widespread. In fact, output has been reallocated across industries and productivity has increased….
The Canadian manufacturing sector has shown itself to be diverse enough that manufacturers in some areas have benefited from the resource boom. In particular, machinery and equipment,computers and electronics, primary metals and metal fabrication have increased their output following the resource price increases that began in 2003.
However others might take issue with the rosy productivity picture: earlier this week, TD released a piece by Don Drummond and Ritu Sapra bemoaning the Canada’s low capital investment (especially machinery and equipment) which they argue is a contributor to Canada’s persistent low productivity. The Canadian dollar strength and corporate profits they argue provides an opportunity of which many are not taking advantage. They cite currency and exchange rate uncertainty and the fiscal regime as likely drivers.
Update: Today’s TSX fall – along with other global markets puts into focus the increasing role that resources play in Canada’s economy. while all sectors saw losses, likely as margin calls came into effect, the resource sector predominated.
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