Ontario has paid a high price for Western Canada’s resource boom and the resulting surge in the value of the Canadian dollar since the early 2000s.
The high dollar hit Canada’s manufacturing heartland especially hard.
We now have what former Bank of Canada governor David Dodge calls “a two-speed economy.”
In its latest report on the Canadian economy, the Organization for Economic Co-operation and Development contends a recent softening in our dollar might give a lift to the economy.
But the dollar could go higher in the future as oil industry forecasts of much higher production materialize.
The surge in the Canadian dollar has meant Ontario manufacturers and service industries exposed to international competition (including tourism) lost competitiveness, sales and jobs.
Manufacturers had a tougher time exporting and faced greater competition at home from imports.
Our high dollar also made us less attractive as a location for new North American investment and put us at a disadvantage when multinationals consolidated North American production and had to choose where to close plants.
Ontario manufacturing went into decline well before the Great Recession of 2008-09, with the dollar climbing in value from the early part of this decade.
According to Statistics Canada, manufacturing wages and salaries in Ontario fell 16 per cent between 2004 and 2012, to $35.6 billion.
This meant nearly $7 billion less in wages and salaries in 2012, compared to 2004.
The number of manufacturing employees fell by 27 per cent, or 244,584, to 655,060, and manufacturing value-added fell by 17 per cent, or $18.2 billion, to $91.4 billion.
This also had a big impact on provincial government revenues.
The biggest hits occurred in the auto and auto parts, plastics, primary and fabricated metals, and computer and electronics industries.
Even though North American auto sales are recovering, a recent RBC Economics report says less than 20 per cent of auto industry jobs lost during the recession have been recovered, shipments remain 15 per cent below pre-recession levels, and capital spending in the industry remains low.
Canada’s auto industry will likely continue to lose North American production share unless there is a big pickup in investment.
But that will depend on investment support from the federal and Ontario governments to overcome our cost disadvantage.
Canada’s effective exchange rate has “appreciated significantly over the past decade” due to the resource boom, the OECD says, blaming the high dollar for much of the manufacturing crisis.
“Business-sector unit labour costs increased by 98 per cent between 2002 and 2011, compared to a U.S. increase of only nine per cent.
Most (73 percentage points) of this difference is attributable to exchange rate appreciation,” the OECD says.
The remainder, it says, was due poor productivity growth, with labour productivity increasing just six per cent, compared to 21 per cent in the U.S., highlighting this productivity gap as a key challenge for Canada’s future prosperity.
As Dodge points out in an economic report for law firm Bennett Jones, “the cumulative loss of cost competitiveness since 2003 remains exceptionally large by historical standards.”
While it was unreasonable to expect Canada to maintain or boost its share of world exports as countries like China and Mexico invaded world markets, Dodge says, Canada’s share of U.S. non-commodity imports fell from 14 per cent to eight per cent since 2000.
“To lose market share of U.S. non-commodity imports so dramatically in the last decade or so raises questions about Canada’s capacity to prosper in global markets without substantial improvements in Canadian competitiveness.”
This is where the rubber hits the road.
As the OECD says, our productivity performance has been mediocre — particularly what economists call multifactor productivity (MFP), which effectively measures the pace of innovation and reallocation of resources across firms and industries.
From 1996-2009, Canada had an annual average growth in MFP of 0.0 per cent, or zero, compared to 1.2 per cent for the U.S. Our productivity gap with the U.S. is an innovation gap.
“Because MFP captures the main sources of rising living standards over the medium term,” the OECD concludes, “it remains Canada’s single largest long-term challenge.”
Yet in Harper government’s mind, our single largest challenge seems to be to export more oil — and hope that will bail us out.
But it won’t. Only a much better performance in innovation, leading to higher productivity and greater competitiveness in the overall business sector, will put us on the right path.
Economist David Crane is a syndicated Toronto Star columnist. He can be reached at crane@interlog.com.