Boom or bloom?

In China last spring, Prime Minister Stephen Harper declared: “We want to sell our energy to people who want to buy our energy. It’s that simple.” Critics fumed, just as they had nearly three years earlier when, in Seoul, he praised South Korea’s “genius for industry and manufacturing” and pledged Canada “has the energy and minerals Korea needs to fuel future growth.”

In fact, they’ve ground their teeth to nubs because Harper consistently repeats the message that Canada’s ambition is to supply fossil fuels, minerals and lumber for others to turn into finished goods. To back it, his government has cut corporate costs and streamlined environmental reviews, unwaveringly supported oil sands and pipelines, and demonized their foes.

Critics say this policy is overturning the effort, since Confederation, to create a diversified industrial, and now high-tech, economy. It’s hauling Canadians back to being menial “hewers of wood and drawers of water.”

“Traditionally, Canadian policy-makers were preoccupied with escaping our status as a supplier of natural resources and commodities,” says Canadian Auto Workers economist Jim Stanford, in research done for the Canadian Centre for Policy Alternatives. “That historic trend was reversed, however, beginning around the turn of the century … profoundly remaking Canada’s economy, our role in the world, and indeed our very federation.”

This, it’s argued, makes Canada vulnerable to boom and bust cycles in commodities, threatens our environment and kills manufacturing jobs. 
Sovereignty might be at stake, too, with China an ever-larger resource investor and customer. “Canada has often been referred to in jest as the 51st state,” Phillip Colmar, a Montreal-based partner with investment consultants Macro Research Board, wrote last year. “However, it is becoming more accurate to regard Canada as another Province of China.”

Harper’s defenders insist that in a world of open trade, each country must focus on what it does best.

“Canada’s success in exporting natural resource-based products … does not reflect a failure on the part of the Canadian economy or policy-makers,” says Michael Burt, an associate director of the Conference Board of Canada. “Rather, it is a reflection of our endowment of resources and what we are good at doing relative to other countries.… Rather than trying to break away from our past, we should leverage this strength to expand the list of things for which Canada is regarded as a global leader.”

Denigrating resource industries “ignores the reality that there are always going to be better ways to hew wood and draw water – that high-skilled, high-paying jobs and advanced products, processes and systems are fundamental to success in resource industries,” the Ottawa-based Public Policy Forum states in its report, “Towards a More Innovative Future.” “There is as much economic potential for innovation in the natural resources sector as in any other.”

Furthermore, politicians of all stripes join Harper as resource cheerleaders. 
Even Ontario, the manufacturing heartland, wants to fast-track the massive deposits of chromite and other minerals in its “Ring of Fire” region in the far north. “We've got emerging economies with an insatiable hunger for resources,” Premier Dalton McGuinty, a Liberal, said in a June speech extolling potential jobs and export sales. “Failure is not an option; success is mandatory.” 

The debate over “resources first” currently centres on whether – as Official Opposition Leader Tom Mulcair recently claimed – Canada suffers from “Dutch disease,” the economic malady named for alleged impacts on the Netherlands after large reserves of natural gas were discovered off its coast half a century ago. The “disease,” the theory goes, dangerously distorts an economy that relies on a single commodity – in Canada, the oil in Alberta’s sands and off Newfoundland and Labrador. Windfall revenues inflate the dollar, which decimates manufacturers in Ontario and Quebec by raising their input costs while making it harder to sell abroad and flooding the domestic market with cheap imports.

Statistics do show Canada’s shift toward a resource-based economy.
Stanford notes that in 1867, every export was a raw material. The proportion of value-added goods gradually rose until, in 1999, it hit 56 per cent. Then, that trend reversed. Last year, manufactured products contributed little more than one-third of exports.

Total manufacturing jobs peaked at just over 2 million in 2000 and have since dropped to 1.45 million, reports Toronto-Dominion Bank economist Dina Cover. Manufacturing output fell from 17 to 12.5 per cent of GDP, and jobs from 16 to 10 per cent. While manufacturing’s exports have stagnated since 2003, energy’s have tripled. Per-capita income rose in the resource-rich provinces and dropped in Ontario, the Organization for Economic Cooperation and Development (OECD) says in its latest Economic Survey of Canada. 

But does Canada have Dutch disease? Colmar says yes: “A severe case … has dramatically reduced the breadth of the Canadian business sector over the past decade, hollowing out manufactured-goods exporters and making the nation increasingly reliant on commodity demand.”

Derek Lothian of the Canadian Manufacturers & Exporters (CME) – a group that outsiders might assume would fear a shift to resources – disagrees. It’s “over-simplistic and very dangerous” to complain about the resource boom, he says. “It’s divisive. When we talk about Dutch disease, we’re splitting Canada into three parts. Nobody wins with that.”

Lothian paints an optimistic picture: Canada created 150,000 manufacturing jobs in the past six months, the most in recent memory. About 80 per cent of Canadian factories – albeit a reduced number – operate at full capacity. Despite concerns about unemployment, half of CME’s Ontario members suffer labour or skills shortages.

Ontario’s government boasts of having 18,000 information and communications technology firms in the province last year, up 3.1 per cent from 2010. Much of the activity is related to resource industries. Oil company research and development spending has tripled since 2003. About 250 Ontario manufacturers make products for the oil sands; one in 12 jobs in Kitchener-Waterloo depend on them. With $500 billion in planned resource projects, there should be plenty of opportunity. The oil sands’ massive machines come from Japan, Germany and the United States, but Canadian firms even have a crack at that market, Lothian insists.

This is obviously complex territory, and Mulcair’s complete argument – ignored in counterattacks – hints at that: “We’ve lost 500,000 good-paying manufacturing jobs since the Conservatives came to power,” the NDP leader said. But while "everyone concludes that more than half of them are being lost because we’re maintaining the Canadian dollar artificially high," international trade patterns are also to blame. And the oil boom’s impact is particularly strong, he argued, because the price charged for the resource doesn’t cover its environmental costs. That unnecessary bargain further inflates exports and the currency.

After studying the impacts of dollar parity on 80 manufacturing categories, the self-described “non-partisan” Montreal-based Institute for Research on Public Policy (IRPP) concluded Canada has a mild case of Dutch disease: “The results are more nuanced than conventional wisdom would suggest.” 

Only 25 categories, accounting for one-quarter of Canada’s manufacturing output, were significantly harmed by currency parity, it said. “The effects are most pronounced in small, labour-intensive industries such as textiles and apparel. Larger industry groups such as food products, metals and machinery are much less adversely affected by the strong dollar, and these minor problems have generally been offset by strong growth in demand.”

Research cited in that study concludes Dutch disease was a small factor in other resource booms: Even in the Netherlands, “only 4 per cent of the variability in manufacturing output can be explained by the growth of the energy sector.”

“We have a high dollar,” Lothian says. “But it’s not petroleum pressure pushing it up. If anything, it’s the weakness of the U.S. economy. Business has to learn how to live with it.” 

Manufacturers are doing that, some by taking advantage of the resource boom. But along with the mountain of low-wage competition, analysts say, they face domestic hills – attitudes and policies that amplify the boom’s harmful impacts and diminish its opportunities.

“The presence of resource rents might itself dull the drive to innovate,” the OECD says. “It is indicative that resource-rich countries like Canada, New Zealand and Norway all appear to underperform when it comes to innovation whereas their resource-poor counterparts like Israel, Korea and Japan are highly innovative.” 

The OECD survey cites specific flaws:
• Canada’s productivity has dropped since 2002, while the United States' has improved. The gap is widest in knowledge-intensive, high-research industries.
• Business spending on research and development is half the American rate, and that gap, too, is growing.
• Canada gains less business activity from investments in education and basic research than any country in its “global peer group.”
• With manufacturing dominated by foreign-owned branch plants, Canada "appears to be rather far from the R&D and intensive high-tech manufacturing frontier.”
• Subsidies, tax breaks and other incentives are poorly targeted.
• By setting strict technical requirements rather than letting bidders propose the best way to do a job, government procurement hinders innovation.

The American Council for an Energy-Efficient Economy ranks Canada 11th in energy efficiency among the world’s dozen biggest economies. It asks: “How can (a country) compete … if it continues to waste money and energy that other industrial nations save and can reinvest?”

Even those bullish about manufacturing warn such issues must be addressed. “We can’t continue on the path we’re going,” Lothian says. 

Among his proposals: Two-year write-offs for all capital investments; better alignment of university research with manufacturers’ needs; increased collaboration between colleges and industries to ensure graduates fit jobs; training credits; more research that leads to saleable products; greater focus on innovation in government contracts; and perhaps most crucial, better management of resource income.

Norway is considered the gold standard in this area. It taxes offshore oil producers at a total rate of 78 per cent, with deductions for production investments. The revenue goes into the Government Pension Fund Global, which invests only in foreign markets. Just a small portion of that income – never principal – has paid for a few government services and manufacturing supports. Norway mainly pays its way from general tax revenues. The fund aims, instead, to “meet the rapid rise in public pension expenditures” and support “long-term management of petroleum revenues.”

The pool is $550 billion and investment income now exceeds oil revenues.
In contrast, oil sands producers pay less than 35 per cent in federal and Alberta taxes and royalties. A report by the University of Alberta’s Parkland Institute says that since 1986, industry has reaped 10 times the public share of oil sands wealth. 

The province used its share to fund operations and cut taxes. In 1976, it created the “rainy day” Alberta Heritage Savings Trust Fund. But it put only part of the revenue into it, and in 1987 those contributions stopped. The fund today totals only $15.4 billion – barely $2 billion more than 35 years ago.

Calls for a national fund fall flat since, unlike Norway, Canada’s provinces control energy. Still, the IRPP says, “Ottawa can use additional federal tax revenues stemming from natural resource booms to invest in infrastructural and other activities that bolster the competitiveness of the manufacturing sector as a whole.”

Others propose measures to realistically price carbon and the costs of mitigating environmental impacts. Even the conservative OECD recommends the “pricing of environmental externalities, notably in the areas of carbon emissions and water quality.” 

But the government rejects such proposals. “The collection of so-called windfall taxes must be approached with enormous caution,” Harper said in an April speech in Colombia. “The ancient fable about the killing of the goose that laid the golden egg still contains much wisdom.” Rather than incorporate environmental costs into the oil sands and other resource industries, it’s dismantling environmental protection and gutting its science and monitoring staff. 

At the same time, the government is ignoring renewable energy – which last year attracted more investment globally than fossil-fuel projects – and other opportunities, says Dan Woynillowicz, director of strategy and communications with the Pembina Institute. “While other countries focus on developing energy technologies to compete in the future, (Canada) seems content to focus on increasingly outmoded fossil-fuel resources.” 

All this suggests Canada’s critical ailment isn’t Dutch disease or resource-fuelled dollar hypertension. Instead, it’s a narrow, almost desperate approach to resource development that risks despoiling Canada and tying it ever tighter to buyers who might either fade away or make demands Canadians won’t want to accept. 

While the boom won’t stop, a more balanced and coherent strategy could enhance the environment and create long-term opportunities throughout the economy.