Saturday, June 28, 2014

Are you suffering from Dutch disease?

The Alberta tar sands (visual approximation)
Is your economy tired and listless? Are you losing jobs but don’t know why? Did your trade surplus turn into a deficit? Did you elect a bunch of corrupt Liberal lackeys who promised to cut everything under the sun, and yet the neoliberal heaven on earth hasn't materialized? Well, you may be suffering from Dutch disease. No, this has nothing to do with legalized prostitution. Dutch disease refers to a decline in the manufacturing sector of an economy as a result of an increase of the exploitation of a natural resource. The term was coined in the 1970’s to describe the effect of the discovery of a large natural gas field by the Netherlands in 1959. When the price of a raw material increases, exporters of this raw material receive more and more money from importing countries. Inevitably, the value of its currency increases proportionally to the price of the commodity, making their production in other sectors, especially the manufacturing sector, much less competitive. This is what happened in the Netherlands in the 1960’s and this is what is currently happening in Canada, especially since 2003.

Diagnosis: The oily source of the problem

The source of the ailment in our case is in a distant and foreboding land where an evil, black and sticky substance festers underneath the ground. Efforts to extract this substance have resulted in a devastated and toxic landscape. No, it's not Mordor. Rather, it’s a pestilential land called Alberta, where beer-bellied rednecks terrorize the countryside with their SUV’s and ten-gallon hats. And the toxic substance in question comes from a large and growing hole in the ground in northern Alberta. It's a particularly polluting form of oil that is affectionately called tar sands.  

Just as confinement in an oxygen depleted environment can foster harmful bacteria, prolonged exposure to conservative governments and the right-wing Canadian media produces harmful short-sighted conservative greed-weasels for whom money is more important than people and the environment. Ottawa has become the natural habitat of the Canadian greed-weasel. Their single-minded obsession with turning Canada into a global energy superpower, combined with the vast amounts of tar-laden sand in Alberta, has produced a noxious industry that exports oil throughout the world... well, 86% to the US, with most of the remainder going to Asia.

The effect of which is to drive up the value of the Canadian dollar relative to other currencies, which hurts the economies of provinces that depend on the export of manufactured goods. In Canada, the regions that benefit from rising commodity prices are not the same as the regions suffering the negative effects of the increase in the value of the currency and the loss of competitiveness in the manufacturing sector. Alberta, Saskatchewan and Newfoundland are the big winners, Quebec and Ontario, the big losers. If Alberta and Quebec had distinct currencies, Alberta’s would be valued much more that Quebec’s. This would help Quebec’s exports but turn Alberta into a petrostate like Kuwait and Bahrain that exports oil and not much else. As it is, since both states share a currency, Alberta benefits from a Canadian dollar that is lower than what it should be (from its perspective), and Quebec is penalized by a Canadian dollar that is higher than what it should be.

Prognosis: The ever declining economy of Quebec

Without a drastic cure the future is bleak. According to a study by the CIBC there is a very strong link between rising oil prices and the rise in the Canadian dollar. It even says that the correlation between the increase in commodity prices, mainly oil, and the value of the dollar is approaching 100% (page 5)!

And this not very leftist bank, also mentions Dutch disease ...
"The impact of the Dutch disease on Canada’s factory sector has meant that what were once trade surpluses in auto parts, rail equipment and other manufactured goods are now deficits, leaving commodities as the sole source of Canada’s trade surplus by the end of the last expansion, and making the currency even more tied to commodities."
In fact, the trade balance of Quebec went from a surplus of $6 billion in 2002 to a deficit of more than $27 billion in 2010. In Ontario, it went from a surplus of $22 billion in 2002 to a deficit of $31 billion in 2010. In short, the trade balance deteriorated by $33 billion in Quebec between 2002 and 2010 and $53 billion in Ontario! Dutch disease is a disease that costs quite a bit of money for some people while enriching others. This, in turn, cost Quebec an estimated 55,000 manufacturing jobs in only five years which, of course, leads to other negative consequences for the economy. The value of the Canadian dollar is expected to increase in time (Jeff Rubin, former chief economist at the CIBC bank, believes that the Canadian dollar will eventually exceed the American dollar by as much as 20%), so things will only get worse for Quebec.

Prescription: Independence with a separate currency

Some claim that Quebec benefits from being in the Canadian federation because of the equalization payments it receives ($3.8 billion in 2003-2004 to $8.55 billion in 2010-2011). After all, even if the monetary policies or the investments in economic development of the federal government favors other provinces, you still get a wad of cash, right? Isn't that great? No, not if you consider that for at least ten years, one of the biggest problems of the Quebec economy has been the strong Canadian dollar. While the value of the Canadian dollar versus the US dollar rose from less than $0.63 in 2002 to parity in 2012, an increase of 37%, the international trade balance of Quebec went from a surplus of more than $6 billion to a deficit of nearly $29 billion (I know I'm repeating myself but it bears repeating). In percentage of GDP, this deteriorating international trade balance corresponds to a shift from a 2.4% surplus to a deficit of 8.1%! Does equalization really cover that? I don't think so. In any case, we are endlessly depicted in the Canadian media as transfer payment junkies or even beggars living off the largesse of Alberta. This is even parroted by clueless buffoons from Quebec like Conservative minister Maxime Bernier and Alain Bouchard, CEO of Couche-Tard.

By adopting a Quebec dollar, Quebec could greatly reduce this deficit, because it would be able to devalue its currency by at least 20% relative to the Canadian dollar which would make products from Quebec much more competitive and imports more costly. In addition, Quebec would gain an essential tool for getting out of a recession. It is also noteworthy that Iceland, which has its own currency, even though it only has slightly more than 300,000 inhabitants, was able to get itself out of the European recession while countries with much stronger economies are still undergoing austerity measures and unemployment rates above 25% in Southern Europe because they have adopted the euro... 

I'm not claiming that switching from the Canadian dollar to a Quebec dollar would happen without any hitches. There are dangers which is why the PQ prefers not to talk about it (even though they should). For example, the currency of a small country is always more vulnerable to currency speculation than that of ​​a large country. That said, this did not prevent speculators from attacking the British pound in 1992 ... In addition, the cost of imports, including those of petroleum, would increase significantly. But wouldn't this be an incentive to end our dependence on oil and perhaps switch to a greener, more hydroelectricity based economy?