Friday, 14 September 2012

Die Dutch Disease Story, Die

Seriously Mulcair, stop beating this drum will you? "Unbalanced economy fuelling Ontario job losses, Thomas Mulcair says"

Yes the high Canadian Dollar causes palpitations amongst Canadian manufacturers. I work for an Ontario based Manufacturer, and when talking to the accountants at head office they make that worry very plain. Yes our resource based economy is a contributing factor, BUT, I do not share Mulcair's idea that the government is at fault, or can do much, if anything about it.

What Mulcair (and other Dutch Disease proponents) does not understand, is how heavily dependent manufacturing is on the price of oil. Oil, and its by-products, can make up a significant portion of the raw materials used to manufacture products and is a significant factor in the cost of shipping raw materials and finished goods.

Imagine for a minute if the Alberta oil-sands were never developed. Would we not then have oil at over $100 a barrel (in US $$) and a $0.60 CDN dollar? How competitive would our manufacturing sector be in that world? (Hint, not very.)

As others have pointed out, there are multiple factors that can make any given manufacturer competitive in a sector. Blaming it all on the Harper Government and the Oil Sands is wrong, and dangerous.

So Thomas Mulcair. Wise up will you?


Anonymous said...

the economy is a witches brew of random events
real world evaluations of "economic experts" shows
2 out of 3 are wrong
if i hear "the harper government stands for a strong and stable economy and job creation" one more time....
none of them have any leverage on the economy
i would like to hear some corporate guy suggest
"hey we have all this refunded tax money ....what do you say ? lets go hire more people?"
never happens

ADHR said...

One thing the government could do is stop propping up the resource sector with loans and investment and start investing in manufacturing and other non-resource industries. (Harper isn't the only one to blame here; McGuinty has to take the hit, too.)

And one industry the government could invest some money in is oil refining. The fact that we ship oil out via international companies and ship refined gas (and other petroleum products) back in, with consequent tariffs, isn't helping the cost of manufacturing.

Generally, though, governments in Canada and the US need to wake up and recognize that hoping the international investment fairy springs up and solves our industrial problems, and dumping money into the resource sector in the meantime, is a short path to economic failure.

Catelli said...

ASFAIK refining isn't that profitable an industry (I know, counter-intuitive, right?) which means to encourage a company to invest in a new one would involve a form of corporate welfare, which I'm not really for.

Other than loans (which are paid back, in theory) what are the figures for Gov't investment in resource and none-resource based sectors?

Catelli said...

Even given your arguments as put forth, I'm still very skeptical that an investment in Manufacturing would achieve a significant boost.

Related to this, I am supportive of Gov'ts trying to nurture a "green" sector, but only because it would produce beneficial technology that would hopefully blossom into a self-sustaining sector of the world economy. The key word being "world". There's no guarantees that it would significantly alter local CDN economies for the long-term, e.g all the manufacturing of solar panels (as an example) winds up in India/Bangladesgh within 10-30 years even despite our local investment.

ADHR said...

I don't know that anyone collects complete statistics on government investments. Theoretically, it should be in the federal and provincial budgets. It might take some judicious FOI requests to get complete data, though. I do know that about 3 out of every 4 news stories I see about the government providing funding for something are resource sector stories (the rest are cultural/heritage stories). And I watch the news from across the country five nights a week, so I think that's a pretty sound (if imperfect) sample.

The general point is that no country that's had significant economic success has done so by waiting for private investment. Some combination of grants, investments, and protectionism is necessary to get an industry up and running. At which point, it can become a "world" industry. Most world industries really aren't any such thing; they're American or German or Japanese or Korean, with branches in other countries. (Meaning: the centre of the company and the bulk of the employment stays in the country of origin.) So, even if manufacturing ends up in India or Bangladesh, as long as it started here, then we end up seeing the largest benefit.

"Corporate welfare", if it's done to prop up a failing industry, is a bad idea. But providing seed funding and erecting legal barriers to allowed new industries to get started, develop and become strong enough to compete on their own is pretty much the recipe for economic growth. Basically, free market economics just doesn't work. It's a nice theory, and very elegant, but it doesn't fit the way economies develop. Government is needed to create industries.

Very good book on this I just finished (hence why it's on my mind): 23 Things They Don't Tell You About Capitalism. Author's an economist at Oxford.