Economic model shows cracks

It was Quebec Premier Jean Charest who recently highlighted the big change taking place in our economy. “There are two realities in Canada,” he said. “There are the economies of oil, gas and potash — and others.”

It was Quebec Premier Jean Charest who recently highlighted the big change taking place in our economy. “There are two realities in Canada,” he said. “There are the economies of oil, gas and potash — and others.”

What he was pointing to was the major — and dangerous — shift underway in Canada, undermining manufacturing, centred in Ontario and Quebec, as the export of unprocessed raw materials produced mainly in Western Canada sent up the value of the Canadian dollar.

The Canadian dollar is seen internationally as a resource currency, so rising commodity prices and increasing export volumes have helped send the Canadian dollar to approximate parity with the U.S. dollar, and could send it well above the U.S. dollar if the Keystone and Gateway oilsands pipelines go ahead (the U.S. has left the door open for the Keystone project if it modifies its route). Oilsands output could roughly double to four million barrels a day by 2020, according to the Alberta government, with most destined for export.

The high value for the Canadian dollar raises the price of Canadian exports in foreign markets, making them less competitive, and makes imports from other countries cheaper. It makes foreign travel to Canada more expensive and Canadian tourism abroad cheaper. It leads manufacturing companies to shift production abroad and makes it harder to attract new manufacturing investment from abroad. And it puts downward pressure on wages of manufacturing workers and the number of their jobs.

This shift resulting from a high Canadian dollar will make it much tougher, for example, for Ontario to attract new automotive industry investment or even keep what it has. And it will increase pressure on entry-level workers in manufacturing to accept much lower pay and benefit packages than existing workers, and for existing workers also to accept big cutbacks.

Yet despite the problems the high exchange rate is creating for Ontario and Quebec, the government of Stephen Harper seems to have made advancing Canada as “an energy superpower” its core economic strategy. While there are some Canadian manufacturing opportunities in the construction phase of energy projects, there is no manufacturing strategy.

The Bank of Canada’s January 2012 Monetary Policy Report acknowledges the impact of Canada’s high dollar on manufacturing. “Competitiveness remains a challenge for Canadian firms,” it says. “Unit labour costs have continued to increase relative to those in the United States over the past year, resulting in a cumulative gap of almost 40 per cent between the beginning of 2005 and the third quarter of 2011.”

The appreciation of the Canadian dollar “accounted for most of this deterioration in competitiveness,” the bank says, though it estimated that about one-quarter was due to a weaker productivity performance by Canadian firms.

But the bottom line is that the high Canadian dollar, caused in large part by high energy prices and growing resource exports, is having a devastating impact on manufacturing. As a result, the bank says, Canada’s overall trade performance will contribute little to Canada’s economic growth for the next two years, in part due to “ongoing competitiveness challenges, including the persistent strength of the Canadian dollar.”

Data from the U.S. Bureau of Labor Statistics show the impact of our rising dollar. In 1997, when our dollar was trading at about US72 cents, U.S. hourly compensation in manufacturing was US$23.05 while Canadian hourly compensation was US$18.84. In 2010, when our dollar was trading at about US97 cents, U.S. hourly compensation in manufacturing was US$34.74 while in Canada it was US$35.67. While Canadian manufacturers have been striving to boost productivity, their gains have been more than offset by the rising dollar.

According to a survey by Statistics Canada and Industry Canada, in 2007 to 2009, 25.2 per cent of manufacturing companies with 250 or more employees relocated some of their business activities outside Canada, with the transfer of the actual production by far the largest activity transferred abroad.

In the United States, the Obama administration has made boosting manufacturing its most important economic strategy. This is true in Britain as well. Meanwhile, China, India and Mexico are striving to improve their manufacturing strengths.

Yet in Canada, our government seems almost single-mindedly focused on exporting raw materials. The result will be a more vulnerable Canadian economy that is hostage to world commodity prices and demand.

For a more secure national economy, we need an advanced manufacturing and business services strategy that can deliver high-value jobs and output across the country.

Economist David Crane is a syndicated Toronto Star columnist. He can be reached at crane@interlog.com.

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