Dutch disease has hit Canada, OECD says

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 warned in a report Wednesday 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 in order to maintain high levels of employment and an equitable distribution of wealth across regions.

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

A similar problem occurred in the Netherlands after its North Sea oil fields created a new source of resource wealth and contributed to the hollowing out of the manufacturing sector there, hence the term Dutch disease.

"I don't think you can really deny it," said Peter Jarrett, one of the report's authors.

"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 issue has become politically charged in Canada ever since NDP Leader Tom Mulcair postulated this spring Western Canada's booming resource-based economy was undercutting central Canada's manufacturing base. His comments were criticized as divisive by the federal government, as well as some prominent Liberals.

Mulcair recently visited the oilsands in a highly publicized fence-mending mission, but has not retracted his statements.

Asked to respond to the OECD analysis, Finance Minister Jim Flaherty did not answer directly, instead saying that overall, the report was "laudatory" of Canada's economic performance.

Alberta Premier Alison Redford said the OECD had expressed similar views in the past, but she disagreed.

"I think I've made it very clear with respect to Alberta's position... we are the economic engine of the country, leading growth in the country, attracting investment at a tremendous rate, seeing tremendous opportunity across this country with respect to manufacturing jobs," she said.

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."

Meanwhile, it adds: "Alberta remains the most affluent province, thanks to its energy wealth."

The fact 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.

Other recent Canadian papers on Dutch disease have tended to reach mixed conclusions.

-- The Canadian Press

Republished from the Winnipeg Free Press print edition June 14, 2012 B5