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More on the OECD and Dutch Disease

Further to my earlier post on the OECD and “Dutch Disease”, I have received a heavily redacted response to an access to information request (A-2012-00073/CN.)  submitted to the Department of Finance, seeking any comments on the draft assessment and recommendations of the OECD delegation to Canada in 2012.

This arrives just as Conservative ads attack the “risky economic theories” of Mr. Mulcair.

It is normal practice for drafts of the OECD Economic Surveys to be discussed with the Canadian government before they are adopted by the OECD.

While 238 pages of documents of comment and input were identified as relevant to my request, almost all of the material was denied to me, mainly on the grounds that it contained information obtained in confidence from an international organization, or involved advice on the operations of government.

However, the material I received confirms – via a memo from Benoit Robidoux to the Deputy Minister of Finance Michael Horgan dated March 7, 2012, just prior to a meeting with the OECD  policy mission on March 14 – that the OECD draft recommendations included this as the first recommendation:
Create a sovereign wealth fund for natural resource revenues and invest in foreign assets to limit the effects of Dutch disease, while saving for future generations.”
That recommendation disappeared from the published Economic Survey of Canada for 2012 , even though there was some significant supporting argumentation. at p.13 :
“The Canadian dollar has appreciated significantly in the past 10years and remains strong both against the US dollar and on a trade weighted basis. This appears to be largely explained by sharp increases in commodity prices, especially for energy. The appreciation has contributed to a worsening of the current account balance from a surplus of around 2% of GDP in the early 2000s to a deficit of near 3% in recent years. The economy continues to undergo structural adjustments due to these persistent relative price movements since the early 200s. The export oriented manufacturing sector had by by 2011 shrunk to only 12.6% of total value-added, down from a peak of 18.6% in 200. Its share of employment has also fallen substantially over the past decade (from 15.2% to 10.2%) and somewhat more than in the United States. Both outcomes have been clearly correlated with exchange rate developments. Regional growth disparities – based on a real personal disposable income per capita measure – mirror these divergencies in sectoral activity.”
Clearly, the OECD – not widely known as a source of “risky economic theories” – endorses the Dutch Disease diagnosis. Our exchange rate has been driven up by high commodity prices, especially energy prices, thus damaging the manufacturing sector and creating regional economic imbalances. And we should do something about it.
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Comments

Comment from Paul Tulloch
Time: June 27, 2012, 11:28 am

I am working right now on looking at the correlations between oil price- exchange rate – manufacturing employment.

Will send to the site when it is complete. But looking at the exchange rate and the manufacturing employment levels in a linear model, over the past 30 years is quite revealing.

Every economist worth their spit should know that a small country next to such a large behemoth as the USA, would be better off with a lower dollar contra production costs. (beggar thy neighbour) Or if you want to be fair with thy neighbours, have an exchange rate near PPP, to allow a level playing field and allow a neutral investment boundary regarding currency differentials.

The other major point- we need to have a debate in this country about our future. Do we want to control our future by building a high value adding adding knowledge based manufacturing economy, or do we want to build a casino like resource extraction based economy.

The answer is neither- we can have both, but not one at the expense of the other, and that is what allowing unfettered resource development has produced. An investment regime within the resource extraction that has been and continues to be subsidized by a high dollar (above PPP), subsidized by free rider polluters not paying the true costs of extraction, subsidzed by the federal government in terms of many long standing tar sand development projects, (and there is a long list here), and subsidized by the east’s loss of a future value adding capacity.

Recall that investment lost in brown field sites, means much more than a loss of assets in production. It is also the loss of momentum and inertia. The higher waged countries of this world succeed at building things- MANUFACTURING. It is a complicated nexus of knowledge, skills, know how, engineering, training, innovation and a well tuned shop floor- all moving in sync – towards an ever more higher quality and innovative output- the key is continuity and change within that continuum.

When we let things such as a inflated dollar start getting ahead of decision variables- it costs us a loss of assets and the rest that go along with it. Not to mention the highest job multiplier effects of any industry- and the quality of down stream jobs attached to these core jobs is distributional wise much higher than resource extraction.

So when we have this debate, lets ensure we are all on the same page here- as we are talking about the future of Canada here, the long term future that will be determined with these political decisions will effect generations of workers.

Comment from Francis Fuller
Time: June 27, 2012, 1:23 pm

Andrew:

Kudos to you and your organization for picking up the tab on the ATI request.

I have one quibble with your last paragraph in which the Dutch Disease / Canadian Dutch Disease (CDD) is referred to as damaging the manufacturing sector.

All Canadians need to understand that CDD impacts all sectors other than the energy sector. The energy sector is the one and only sector which exhibits both low substitutabilty and high demand inelasticities. It is a sector largely impervious to price.

No other sector exhibits similar characteristics.

Why buy expensive CDN pulp when you can substitute cheap foreign pulp? Why buy CDN agricultural products if you can obtain equivalents elsewhere at a lower price? Why travel to Canada when your vacation dollars will stretch further elsewhere? Why fly domestic in Canada when it is cheaper to route through the US?

And the real kicker for any CDN firm contemplating an expansion is why not build in the US, take advantage of lower US labour costs, lower building costs, lower taxes, avoid national preference legislation and then use the US facility as an export platform to service your CDN clients? Both CAT and Timken took this route. Agressive CDN firms may follow. The Fx rate then works to your benefit and fattens your margins.

And it does not stop there. I worked for the world’s largest IT firm for over 12 years until they shut down our workgroup and shipped our duties elsewhere. The cruel irony of that move is that our core CDN clients were public sector organizations and I doubt any of them saw any flow through reductions in their service contract pricing.

Harper is engaged in the destruction of the country while running ads attacking Mulcair’s theories?? Pot meet kettle.

And if any NDP executives read this please be aware that unemployed Canadians have a limited ability to “do something about it.” But I have lots of great IT related ideas and I come cheap but experience zero response to emails to my NDP M.P., Mulcair’s office, or the M.P that ran for the NDP leadership on promoting “grass roots social democracy.”

A prior poster made a crude observation about economists in another post. I think the same comment may be made about the present day loyal opposition. If Harper builds traction and wins a second majority you can kiss the union movement in this country, all of it, goodbye. Plus a lot of other great Canadian traits such as jobs.

Comment from Jeff Dean
Time: June 28, 2012, 8:56 am

I completely support the idea of taxing non-renewable resources fully, but I think we should really question the idea of creating a sovereign wealth fund to invest in foreign assets. Even setting aside the extreme volatility in global investment markets, why should we use our money to invest in developing Brazil, India or China? And laying claim to their future income? We should be asking ourselves what kind of country we want to have when these resources run out. While we deplete one asset we should invest in others, human and physical. We should use the money to transition to a green economy, educate our people, improve our living standards, etc. We could even target it to improving manufacturing competitiveness, which was the recommendation of the IRPP paper “Dutch Disease or Failure to Compete?”. It might also stop the over-appreciation of the Canadian dollar by increasing imports for investment and consumer goods.

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