Is Canada Suffering from Dutch Disease?

From the Winnipeg Free Press:

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.”

I’m denying it (but I’m also not looking at the data). I propose that Canada is not suffering from “Dutch Disease;” we are suffering from socialism – the “Government Disease.” The manufacturing sector is burdened by thousands of economic regulations and policies that favour monopolies over competitiveness. What should be a simple case of the market allocating resources to a more profitable sector has become near capital flight from the manufacturing to energy sectors.

But there’s more to it. A “cheap” or “weak” loonie means a continuing debasement of the Canadian currency. This ensures that real values of rent and income decline; this hurts both workers and capitalists. By contrast, a “strong” loonie lowers raw material costs, capital costs and will naturally bring down interest rates (as opposed to the centrally-planned policy of low rates that gives rise to the boom and bust cycle). Everybody should be celebrating a higher purchasing power of their money.

The reason Canada’s (particularly Ontario’s) manufacturing sector is in a slump is due to state intervention in the economy - not Alberta’s prosperity. If there is a statist solution, it should be the promotion of sound money, high savings, hard work and entrepreneurship. Also, a retraction of all the regulations imposed on the manufacturing sector. The solution is not to tax the incomes of hardworking Albertans to prompt up inefficient Ontario producers.

Nevertheless, the logical conclusion of this debate rests with the currency itself. To avoid all forms of the “Dutch disease” what Canada really needs (in addition to less economic regulations) is competing currencies. As in all goods and services, a monopoly in money means low quality for a high price. But this reasoning can be pushed further: why stop at currencies? The territorial monopoly the federal government holds over the northern section of North America can be broken up into smaller states. This would solve the exchange rate problem the OCED is perceiving.

One Response to “Is Canada Suffering from Dutch Disease?”

  1. Roger says:

    "If there is a statist solution, it should be the promotion of sound money, high savings, hard work and entrepreneurship." Well said!

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