It's a 'disease,' the studies agree

Canada appears poised to rerun the bitterly divisive East versus West resource wars of the 1980s. But a leading economist argues they can be avoided.

NDP Leader Tom Mulcair says the "rip and run" exploitation of Alberta's oilsands is killing Canada's manufacturing sector by driving up the value of the dollar. He isn't against extracting and exporting the bitumen but he wants the environmental cost factored into the international price.

The battle could kill Mulcair's chances at becoming Canada's first NDP prime minister. The last time an "eastern" French-speaking political leader -- Pierre Trudeau -- bucked Alberta's fiercely defensive pride in its oil riches, Albertans plastered their vehicles with bumper stickers screaming "Let the eastern bastards freeze in the dark." Ottawa capitulated.

Mulcair is right about Dutch disease. No less than three studies -- two of which were commissioned to disprove it -- demonstrate that, in fact, Canada does suffer from it, causing our high dollar to snuff out the value-added sectors of our economy.

The most recent report, from Industry Canada and commissioned by the Harper government, contradicts the Conservatives' claim Canada hasn't caught Dutch disease.

"We show that between 33 and 39 per cent of the manufacturing employment loss that was due to exchange rate developments between 2002 and 2007 is related to the Dutch disease phenomenon," states the paper. The peer-reviewed study was written by Serge Coulombe, a former senior research adviser to Industry Canada's chief economist between 2005 and 2008.

A spokeswoman for Industry Minister Christian Paradis said the study does not reflect the views of the government.

Even the study the federal government does like, done by the Institute for Research in Public Policy, acknowledges the loss of manufacturing jobs due to the high dollar. But it argues the dollar is high for reasons other than the oilsands.

The third report, written for the Canadian Centre for Policy Alternatives' annual Alternative Federal Budget by Jim Stanford, chief economist for the United Auto Workers, goes one step further than the other two. It demonstrates how Canada can simultaneously develop the oilsands and revive its value-added, high-employment manufacturing sector.

By the end of the 1990s, Canada had escaped its traditional status as a hewer of wood and drawer of water, Stanford writes. "Well over half of our total exports in 2000 consisted of an increasingly sophisticated portfolio of value-added products including automotive, aerospace and telecommunications equipment and Canadian firms and technology were increasingly recognized around the world," he continues.

Since then, resources are again ascendant, particularly the "enormous expansion in the petroleum sector centred on Alberta's oilsands."

Stanford catalogues the fallout. Economic and fiscal gaps in Canada have widened. In 2005, Newfoundland's GDP exceeded the Canadian average for the first time in history. The next year, Ontario's fell below the national average, also for the first time.

By July 2011, unprocessed and semi-processed resource exports accounted for two-thirds of Canada's total exports, the highest in decades. In contrast, higher-valued finished products made up just one third. "Decades of postwar progress in diversifying Canadian exports and moving up the value chain in our trade has been undone in just 10 years of this resource-led trajectory," writes Stanford. "And it seems the more free trade agreements we sign, the more our role as a global commodity supplier is cemented."

While 600,000 Canadian manufacturing jobs have disappeared since the turn of the century, just 54,000 Canadians were employed in the entire petroleum extraction industry in 2011. That's an increase of a meagre 18,000 since 2000.

That means the massive expansion of the oil and gas sector offset just three per cent of the net jobs lost in manufacturing in the same period.

Stanford lists the other casualties. Business research and development has declined by almost one-third since 2001 and is now just 0.9 per cent of GDP. Canada ranks 30th out of 34 OECD countries in productivity growth. Foreign takeovers of Canadian assets grew another $25 billion in the first nine months of 2011 alone. And while the OECD estimates the "fair value" of Canada's currency is about 81 cents U.S., it is now at par with the U.S. greenback, negatively impacting manufacturing "but also every other non-resource traded industry."

To rebuild, Stanford proposes creating sector development councils involving Ottawa, the provinces, business and labour organizations, universities and financial institutions to foster technological innovation, productivity growth, environmental sustainability and export intensity in such areas as energy technology, aerospace, value-added forestry products, software development and composite materials. He also proposes the establishment of a Canadian development bank.

Dutch disease isn't inevitable if there is a will to diagnose and defeat it.

Frances Russell is a Winnipeg

author and political commentator.

Republished from the Winnipeg Free Press print edition May 23, 2012 A10