Dutch Disease Debunked: Manufacturing Slump Can’t Be Attributed to Booming Energy Sector

Two reports published today by The School of Public Policy offer empirical evidence that Canada is not suffering from a case of Dutch Disease.

Jack Mintz and Matt Krzepkowski reveal that Canadian manufacturing has been in decline for the past 50 years and therefore should not be attributed to the recent run-up in the Canadian dollar. The authors also show that employment in manufacturing has been falling over the last 35 years throughout most OECD countries. This includes countries that don’t have substantial natural resources.

 “Casting blame for lost manufacturing jobs on commodity prices ignores the inevitable fact that, even if the dollar begins to fall, it is unlikely that those lost jobs will return,” the authors write.

The second report by Trevor Tombe and Wardah Naim shows that an appreciating Canadian dollar may actually be helping manufacturing because of increased purchasing power on inputs. Canada has one of the highest fractions of imported intermediate goods among OECD countries. Meanwhile, among Canada’s various industries, manufacturing has the highest imported input ratio at 40 per cent.

“A higher dollar may make it more expensive for foreign buyers to purchase Canadian manufactured goods, but that effect appears to be more than offset by the savings that Canadian producers enjoy with a higher dollar that makes possible cheaper imported-inputs and lower cost of production, which have a lowering effect on prices,” the authors write.

Ontario and Quebec are the provinces that benefit the most from these cheaper inputs, Tombe and Naim argue.

“Policy-makers looking to aid the Canadian economy as a whole, and the manufacturing sector in particular, should stop worrying about Dutch Disease and, rather, welcome a higher Canadian dollar,” they write. “But more than that, they should design policies that are better tailored for an economy that relies so heavily on imported intermediate inputs.”

The reports can be found here.