Canada West Foundation Blog

By: Michael Holden

Over the past few weeks, countless articles have been written about the question of whether or not Canada is suffering from Dutch Disease—an economic affliction by which large-scale development and export of natural resources drives up the value of the domestic currency and thus erodes the international competitiveness of the country’s manufacturing sector.

The issue first captured public attention during a brief but public spat between Alberta Premier Alison Redford and Ontario Premier Dalton McGuinty, but began to dominate headlines when NDP leader Thomas Mulcair took up the cause. The ensuing debate has been regionally divisive and largely unproductive. To the extent that it implies that growth in one part of Canada is coming at the expense of prosperity elsewhere, it is a recipe for disaster from a nation-building standpoint.

Is Canada a victim of Dutch Disease? While there is some debate on the matter, a number of recent studies suggest that there is at least some evidence to support the idea. But a review of the data shows that, even if oil sands activity is driving up the dollar and harming the export competitiveness of eastern manufacturers, it is only a small part of the problem.

To begin with, there should be no doubt that much of the Dutch Disease story rings true in Canada. Thanks to booming oil production and exports, the Canadian dollar has become, at least in part, a petro-currency. As Figure 1 shows, the Canada-US exchange rate began in the early 2000s to mirror movements in international oil prices. This is not to suggest that the price of oil is the only factor that influences the dollar, or that the same effect can be seen versus other currencies. Nevertheless, a clear relationship now exists between oil prices and the Canada-US exchange rate.

Similarly, there is also a clear relationship between the Canadian dollar and the relative health of the manufacturing sector in Ontario (Figure 2). Since the late 1970s, employment in manufacturing has tended to move in the opposite direction of the loonie. This trend is a natural result of Ontario’s heavy dependence on the US market. When the dollar goes up, manufactured goods from Ontario (and elsewhere in Canada) become more expensive in the US, so demand for those products falls and manufacturing activity north of the border slows as a result. When the dollar weakens, Canadian goods become relatively cheap, US demand for them increases and production activity increases. It is no coincidence that Ontario’s peak levels of employment in manufacturing were in the early 2000s, when the dollar was at historic lows.

But is that all there is to it? Are Ontario’s manufacturing woes the result of oil sands activity and is a lower dollar the solution to the problem?

To answer these questions, it is instructive to compare the performance of manufacturing in Canada with that of the US. Using 1990 as a starting point, Figure 3 shows that, at least from an employment perspective, Canada has outperformed the US over the past 20-plus years. Of course, the term “outperformed” is essentially damning with faint praise. In April 2012, Canadian employment in manufacturing was about 13% below 1990 levels while in the US it was nearly 33% lower.

Looking at such a long time horizon captures long-term trends, but it also glosses over the run-up in the Canadian dollar in recent years. From 2002 to 2011, the dollar rose from an average of 63.7 cents US to US$1.01. How did manufacturing employment in Canada and the US compare over that period? As it turns out, they were almost identical; employment levels in both countries dropped by 23%.

In other words, even though the Canadian dollar rose by 59% in nine years, the US manufacturing sector performed just as badly (in terms of employment levels) as the Canadian sector over that period.

Why? The reasons are complex and varied, but the two most obvious contributors are low-cost competition from China, Vietnam, Indonesia and other Asian markets; and the impact of the global financial and economic crisis. The former has been eroding the manufacturing base in North America, while the latter has undercut domestic demand for the goods produced here. The solutions to these challenges are not easy, but most agree that they are found in innovation, productivity gains and a rebound in consumer confidence.

Oil sands activity and high oil prices have undoubtedly contributed to a higher Canadian dollar. And this hasn’t made life any easier for Ontario manufacturers. But the dollar is clearly not the main problem and treating national economic activity as a zero-sum game, where growth in one region must come at the expense of growth in another, is not the solution.

By: Roslyn Kunin

Any reporter knows that if you can get the answers to six questions, you have a story. The questions are Who? What? Where? When? Why? And How?

The biggest economic story that is likely to affect all parts of Canada as we move out of 2011 and into 2012 is not within Canada. Nor is it in Asia, the source of much of global economic growth. It is not in Africa which we should be starting to watch as that continent begins to exhibit growth patterns similar to those in China and India of a few decades ago.

The story concerns the very precarious financial situation in Europe and the on-going, increasingly desperate attempts to ameliorate things or at least generate enough stability to avoid conditions becoming any worse.

So far, we have answered the “what” and the “where” questions. The “when” is now. The “why” is generating growing concern among both political and business leaders and informed citizens. Failure to put Europe back on a secure financial footing could spell the end of the euro as a widespread and growing common currency. It could threaten the European common market and the resulting free trade and mobility. The simple uncertainty of the situation could generate economic retraction in Europe, which could then spread to the rest of the world.

This has led the political leaders in Europe to earnestly seek out “how” to avoid these dire consequences. Greece and Italy have positioned unelected technocrats as heads of their governments, hoping they will be able to find and implement the tough answers needed.

An almost continuous series of summit meetings has been held, featuring Nicolas Sarkozy of France and Angela Merkel of Germany, each meeting seeming to lead only to the next summit meeting. The latest meeting did result in some more specific proposals, including a tax on financial transactions.

Already Britain and others in Europe are stepping back from this potential solution. Nevertheless, the situation is serious enough that this proposal just might work. Merkel has already stated progress could be made even if not all countries choose to participate.

However, there is still one very important unanswered question. The current proposal, and indeed any solution, will involve imposing fiscal and monetary requirements on individual countries. Rules will be set and penalties specified for breaking those rules. The big remaining question is “who” will apply and enforce these rules and penalties?

Europe and the euro zone have always had rules. They were often broken. If previously established deficit limits had been adhered to, Europe would not be in its current mess. So putting in place more rules that will intrude even more deeply into national sovereignty and expecting them to work requires a leap of faith. Unless, and until, there is an agreed upon body with both power and widespread consensual support, an effective solution to the European problem will remain elusive.

By: Roslyn Kunin

It sounded really good when US President Barack Obama spoke in Hawaii after meeting with Canada’s Prime Minister Stephen Harper: his talk centered on an expanded trans-Pacific trade agreement which would significantly increase trade and, in turn, create jobs and generate economic growth.

Canadians should be delighted at this chance to expand trade. We are twice as dependent on international trade as the US.  But the greatest part of that trade is with the US. In western Canada, we have survived the recent economic uncertainties better than much of the rest of the continent, in part because our trade with the Asia Pacific region has been growing. For the first time ever, BC wood exports to Asia have exceeded those to the US.

So it would appear to be a no-brainer that Canada should be jumping at the chance to sell more to the fast growing markets in Asia and not have our foreign trade sector held hostage to the weak and wavering conditions in the US. But, according to Finance Minister, Jim Flaherty, we have to pay attention to details before we move ahead.

What are those details? They are the Canadian monopolies on things like eggs and dairy products that we call “marketing boards”. These boards were put in place to appease the relatively small number of producers of these products by guaranteeing them protected markets for milk and other basic foods. All other Canadians pay for this program dearly in the form of notably higher prices for these groceries. How much higher? Enough to make it worthwhile for those who live close to the US border to pick up their eggs, milk and other dairy products on the south side of the Canada-US border. In fact, Canadians in US border towns are called “cheeseheads” after one of their common purchases.

Not only do the marketing boards increase the cost of living for Canadians, they are also a serious trade barrier. They have been and remain a major deterrent to expanding Canada’s trade opportunities in Asia and elsewhere. So it should be a big win-win to get rid of them. At a time of rising food costs, we would all see the amount on our grocery bills drop while our markets for goods and services abroad would expand and jobs would increase.

Even the protected producers could benefit in the long-run. Once they have lost their monopoly, they are smart enough to figure out not only how to be sufficiently productive to survive in the Canadian market, but also how to compete in markets abroad. We saw this happen in New Zealand when their previously protected food producers were exposed to the winds of competition. The quantity and quality of the output went up, the prices went down and markets and profits expanded. Canadian producers will do, at least, as well.

By: Dr. Roslyn Kunin

Over the years, I have spoken with many people who were planning on starting their own business. They told me about the great product or service they would offer. They described how they would set up the business. They all told me how much money they hoped to be making once the business got rolling.

What they never mentioned, until they were prompted, were customers. That basic business need, someone willing and able to pay for the good or service provided was, if not totally missing from the mental image of the new business, certainly not in the foreground.

We should not be too hard on these aspiring entrepreneurs for not thinking about who was going to buy their output. For a very long time, governments, policymakers, planners and others interested in economic development did the same thing. Some still do so.

Take western Canada as an example. When we think about advancing our economy, we think about inputs. These include our resources and how we can access and develop them. They include infrastructure; transportation, communication, etc. They definitely include human capital—a workforce with both hard and soft skills and, ideally, some relevant experience.

We think about what we might produce. In the past, the focus has been around the question of how the West can move up the food chain beyond its traditional, resource-based industries and into manufacturing and the newer technologies.

What we have not been thinking about is customers. Who is going to want whatever it is we are or might be producing? For too long, we have had an “if you build it, they will come” attitude. But that only happens in the movies.

Relative to much of the rest of the world, western Canada is blessed with various essential resources, an educated labour force, decent infrastructure and political stability. But we are seriously limited by our lack of customers. We have been, and still are, far too dependent on one customer—the United States.

If you have only one customer, the US is a good one to have. It is close, big, speaks English and has similar laws and customs. But it exposes you to the risk of having all your eggs in one basket. We learned this to our sorrow in the last downturn.

To advance western Canada, we need more customers, and those potential customers are sitting across the Pacific and beginning to creep into our awareness. They want, need and can afford the resources and high level services that we can provide.

So let us adjust our focus to look west as well as south. Let us develop the pipelines and other infrastructure needed to serve new markets. Let us develop and add to our customer base. That is how businesses and economies grow.

A new paper released through the Canada West Foundation’s Going for Gold project examines western Canada’s current trade relationship with Asia-Pacific and explains how these markets offer tremendous opportunities for economic growth and prosperity in the West, now, and in the years to come.

Through the Gateway: Unlocking Western Canada’s Potential for Economic Diversification by Expanding Trade with Asia-Pacific by author Michael Holden, Senior Economist provides the background and the numbers that show the importance of this region to western Canada’s economic prosperity. With Asia-Pacific being home to over half the world’s population and exports from the four western provinces to the region accounting for two-thirds of Canada’s total exports (totalling 9.6 Billion in 2009,) Asia-Pacific is second most important, only to the U.S.

“The research shows the importance of Asia-Pacific, not only to western Canada’s economic prosperity, but for Canada.” Canada West Foundation’s President and CEO, Dr. Roger Gibbins explains. “Considerable opportunities exist for western Canada if we take advantage of them and successfully reduce the barriers to trade and investment.”

The report describes two ways in which trade with Asia-Pacific countries promote economic diversification in western Canada 1) export market diversification and 2) export product diversification.

This publication was released at the Through the Gateway event, which was sponsored by the Vancouver Board of Trade on February 22, 2011.

All in attendance received a summary copy of the report. To download the summary report, click here.

To download the full report of Through the Gateway: Unlocking Western Canada’s Potential for Economic Diversification by Expanding Trade with Asia-Pacific, click here.

by Michael Holden, Senior Economist

Resource royalties are a valuable source of revenue for provincial governments in western Canada. In fact, they have been rising steadily in importance since the early 1990s and are nearly as important to provincial government revenues today as they were at the tail end of the 1979 energy crisis . While royalties are a boon to governments’ bottom lines, they present considerable challenges when it comes to long-term planning and fiscal management.

I began examining trends in royalty income as part of my preliminary work on the Canada West Foundation’s "Powering Up" Project. My colleagues and I have been working on creating a detailed and comprehensive snapshot of the existing energy system in the four western provinces, including the impact of resource extraction on government revenues.

In 1981, resource royalties accounted for 23.8% of all provincial government revenues in western Canada. There was a considerable range from province to province: in Alberta, royalties were as high as 43.2% of revenues, while the corresponding figures for Saskatchewan (21.0%), BC (5.6%) and Manitoba (1.4%) were much lower.

After tumbling in the 1980s and early 1990s, a surge in oil and other commodity prices in the mid to late 2000s have meant that royalties are once again a major source of income in the region, particularly in the three western most provinces. For western Canada as a whole, royalties made up 20.6% of government revenues in 2008 (the most recent year for which Statistics Canada data are available). Alberta still leads the pack at 33% of provincial revenues, but Saskatchewan and BC have seen the importance of resource royalties grow considerably since the early 1980s. In Saskatchewan, royalties grew to 24.1% of provincial revenues in 2008, while BC saw the share of income from royalties double to 11.2%.

Is this increasing reliance on royalty revenues a good thing for the western provinces? It really depends on your perspective. On one hand, royalties provide governments with more available funds to spend on goods and services—like health care, education, and infrastructure—or to put towards deficit elimination or debt reduction. This, in turn, eases the burden on provincial taxpayers; the more government revenues that come from resource rents, the less taxpayers have to pay out of our own pockets. By reducing the fiscal burden on taxpayers, royalties also contribute to creating a more competitive tax environment which could help attract businesses, investments and skilled workers to western Canada.

However, overreliance on resource royalties comes with its own set of problems. For one, royalties and royalty rates are closely linked to commodity prices which are notoriously volatile and completely beyond our control. While all government revenue sources are prone to fluctuations, royalty income is far more erratic than most. Responsible fiscal planning is an extraordinary challenge when a major source of revenue can fluctuate so dramatically, and unexpectedly, from one year to the next. How do governments make stable, predicable and long-term spending commitments in such an environment? How do they resist the pressure to increase spending when royalty income rises? And how do they maintain that spending level in the face of a negative price shock?

Additionally, the resources in question are non-renewable. To be sure, some of our resource deposits—like the oil sands—are vast, and some like shale gas are only beginning to be developed, but even these won’t last forever. Moreover, environmental concerns and development of alternative energy sources could change future market conditions in unforeseeable ways.

Should we be concerned about the long-term sustainability of our royalty revenues? Should some of this resource wealth be saved for future generations? Are Albertans missing out on the opportunity to add to the Alberta Heritage Savings Trust Fund and convert part of their present wealth into a form that could provide interest revenue in perpetuity? Should Saskatchewan re-introduce its Heritage Fund? Should BC consider starting up such a fund? These questions are further explored in the Canada West Foundation’s "Investing Wisely" Project.

These questions all require careful study and debate in the community, but two things are immediately clear. First, as resource royalties grow in importance for provincial governments in western Canada, steps need to be taken to minimize the impact of resource price volatility on government revenues. Secondly, better public policy is needed to ensure that both current and future generations benefit from present-day extraction of non-renewable resources. 

Michael Holden is Senior Economist and is currently working on creating a detailed and comprehensive snapshot of the existing energy system in the West as part of the Powering Up Project.

Or, ‘Hello India’ as ‘Namaste’ is the traditional Hindi greeting.

Why an Indian greeting for India?

This past Sunday, Indian flags were flying across Canada to celebrate India’s 63rd year as a sovereign nation. This past June, during the G20 Summit, Prime Minister Stephen Harper hosted a formal dinner for Indian Prime Minister Manmohan Singh. After roughly forty years of cool (some might even say cold) relations between India and Canada, events such as these symbolize a marked warming, and celebration of Canada’s relationship with India. India currently ranks 10th amongst Canada’s trading partners but, it is relationship which is proving increasingly important to Canada for a variety of strategic, and trade reasons including: its potential as an expanding market for Canadian goods, and an opportunity for Canada to expand its knowledge economy.

Acknowledging India’s potential as a new market for Canadian goods is nothing new. India is home to a population of 1.25 billion (second only in total population to China) of which an increasing number are middle class. India’s growth has been no less than astounding; with a GDP growth rate that has averaged over 10% the last few years. Both of these facts have contributed to increases in commodity trade by 23%, 116% and 306% in Manitoba, Alberta and Saskatchewan respectively over the past decade.

But, where the potential really lies in doing business with India is not in our lentil and wheat production. India offers a great opportunity for Canada to increase its trade of knowledge and expertise. This is especially apparent in the areas of resources and energy production and infrastructure.

At current rates of economic growth India is demanding that its own energy sources increase production by more that more than 4.3% a year. However, it is faced with a growing carbon footprint and a depleting water source.  Canada can help with a focused and bottom-up approach to share expertise and technology in areas including hydro-electric power and nuclear energy, areas which Canada is a long-time global leader in research and development, as well as biomass and clean coal technologies, where Canada is working towards becoming a global leader. The added bonus being that if India chooses to, while it is developing these energy capabilities, it has the opportunity to develop energy infrastructure that is cleaner than the energy systems in many western countries, something which is an environmental benefit for all.

In regards to infrastructure, one of the biggest challenges facing India and its ability continue on its current trajectory of tremendous growth is its domestic infrastructure, or more accurately, its lack thereof.  But, every problem has a silver lining and in this case, it’s one that offers western Canada opportunities. After all, who is the world is better at building pipelines than western Canadian companies?

At a recent conference put on by Calgary Economic Development (CED) in conjunction with the Indo-Canadian Chamber of Commerce (ICCC) entitled “Doing Business in India”, I had the chance to hear of one such story of trade expertise. Enbridge Technology Incorporated’s Bill Trefanenko told how Enbridge was recently contracted out by an Indian firm to help it develop a gas pipeline to take natural gas from India’s south east coast clear across the country to where they refine petrochemicals on the west coast.

These are just two examples of where western Canadian-Indian knowledge trade has potential.

But, if we are going to be able to take advantage of these opportunities we need to ensure that we build the cultural bridges necessary, we need to better understand India’s business culture. Over 925,000 Canadians identify themselves as Indo-Canadian.  We have the connections, we need to use them! Calgary Economic Development and the Indo-Canadian Chamber of Commerce’s conference was a good start towards this.

Other recommendations for how we can understand and improve business relationships with India include enhancing our focus on building bi-lateral linkages. This could include trade delegations, perhaps similar to the New West Partnership mission that went to Shanghai this past spring. Research and educational institutions also have a large role to play in tapping the Indian market for educational services, and building institutional linkages.

So, we have some work to do if we are going to take full advantage of the opportunities India presents when it comes to western Canadian trade.  But, we would be amiss, when we looked west to only look as far as China’s shores.  Who knows how far western Canadian trade with India can go, and we’re not going to know unless we take the opportunities that are in front of us here and now.

Posted by: Candice Powley

We in Vancouver can identify with our fellow citizens in Toronto as they put up with the inconveniences generated by security for the G20 meetings. Vancouver had its share of disruptions related to last winter’s Olympic Games; but, at least, we had one mother of a party during the Games to compensate. Will there be any reward for Toronto, Canada and, in particular western Canada from the G20 meetings?

Often these high level—to say nothing of high cost—meetings are not very productive and close with an amazingly content-free statement to the media. But, perhaps, the 2010 meetings will be different. Already, and even before the official meetings get underway, China has grabbed the headlines by announcing more flexibility for its currency, the yuan.

First, we should ask why China made this statement now. China has been under very considerable pressure from the United States to allow the yuan to move up against the US dollar. This would make Chinese goods more expensive and a little less competitive in the American market. It would also make US goods and services cheaper for China to buy. Both of these changes would help bring more balance to the one-sided trade that the US now has with China. By making its statement now, China hopes to deflect any criticism of its exchange rate policies. After all, it has already announced it will be adjusting them.

Then we should note exactly what China has said and not said. A conclusion that this means China will soon have a free floating currency would be reading far too much into China’s statement. Instead, China has said that it will allow the yuan to move within an unspecified range against an unspecified basket of currencies. Keeping the range narrow means that there would be little change from the present situation. Deciding what currencies should go into the basket and what weights they should have gives China far more control over the yuan than a free market would allow. In an extreme case, they may not choose to put the US dollar into the basket or they may weight it very low.

To look at what this means for Canada and the West, we would need to know if and to what extent the Canadian dollar will be in China’s currency basket. However, we can be fairly certain that any changes—even if they are little and late—will be in the direction of raising the yuan against the Canadian dollar. This will have a relatively small effect on our imports from China. Already many common goods are now made in lower cost countries like Vietnam.

It will make Canadian resources and Canadian companies that produce those resources cheaper for the Chinese to purchase. So we can expect continued strong sales of our resources into China and increased interest by China to purchase the companies that produce these resources. The former will help maintain a strong economy in Canada, especially the resource rich West. The latter will require vigilance to make sure that any organization operating in Canada follows our laws and maintains our standards. Any change is not likely to be massive, but it will be very interesting to see exactly what and how much China does and how all this plays out.

Dr. Roslyn Kunin is the Director of the Canada West Foundation’s British Columbia Office.

Posted by: Dr. Roslyn Kunin