TORONTO - Don't look to the loonie as the biggest problem facing Canadian exports, Bank of Canada governor Mark Carney said Wednesday in his first-ever public address to organized labour.
The central banker's speech to a gathering of the Canadian Auto Workers' union was not only Carney's maiden public address to a labour group, but also the first time any Bank of Canada governor has made such an overture.
Carney addressed a persistent complaint of those who put the blame for weak exports squarely on the shoulders of the strong Canadian dollar. The manufacturing sector and auto industry have been particularly hard hit in recent years.
He noted Canada's export performance was the second-worst in the G20 over the last decade, with only nine per cent of exports going to fast-growing emerging markets such as China and India.
And he sought to dispel the notion that the high loonie bears the bulk of the blame.
"Some blame this on the persistent strength of the Canadian dollar," Carney said in his speech.
"While there is some truth to that, it is not the most important reason."
The loonie has been trading near parity with the U.S. dollar since late July, and was trading at 100.59 cents US at midday Wednesday. The last time the dollar was below 99 cents US was on July 26.
Carney told union members that over the past decade, Canada's poor export performance is two-thirds explained by market structure and one-third by competitiveness. Of the latter, he said, about two-thirds is the currency while the rest is labour costs and productivity.
"So, net, our strong currency explains only about 20 per cent of our poor export performance," he said.
The structure of the Canadian economy, "unfortunately, is too north-south, not enough east-west in a global sense," Carney said during a media conference after his speech.
"That's going to take a while to change and there's no sense that's not that case."
While CAW president Ken Lewenza conceded that the dollar isn't the only factor affecting auto manufacturing, he maintained that the loonie is more significant than Carney suggested.
"I'm in bargaining with most automotive manufacturers today, and what they're saying is... the Canadian dollar hurts the competitive advantage in Canada, and they're even threatening to leave because of the Canadian dollar," said Lewenza, who added Carney speaks with a bigger picture view of the economy.
"What I talk about is touching workers on the ground and seeing workers lose their jobs as a result of the high Canadian dollar. I touch the emotions of a high Canadian dollar. He doesn't."
The big U.S. automakers have said their focus during negotiations with the union will be on improving competitiveness at their Canadian facilities.
Ford said hourly wages for CAW assemblers are around $34 an hour, while assemblers in the U.S. are paid about $28 per hour.
The company said all-in labour costs, which include pensions and health care, are approximately $79 per hour in Canada, versus $64 per hour in the U.S.
Carney's remarks also touched on a familiar CAW theme: namely, that companies must keep investing in their workforces if they want to succeed.
Carney urged companies and their workers to upgrade their skills so they can compete in the global marketplace.
"We all need to recognize that the durable, high-paying manufacturing jobs of the future will be located in companies that invest to equip and train their workers and that are fully engaged in the global economy," he said.
The demand for unskilled workers in advanced economies such as Canada is waning, he said, adding the need for skilled workers is growing.
The bank governor, after his speech, said the auto sector needs to put more focus on research and development in the production chain. Last month, GM said it would invest $850 million in research and development in Oshawa, Ont.
Carney noted the number of manufacturing jobs has steadily dropped over the last 30 years. He said the use of robotics on assembly lines played a part in that decline, but he added many manufacturing jobs are migrating to low-paying, emerging markets.
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It Began In The Netherlands
In 1977, <em>The Economist</em> coined the term "Dutch Disease" to describe the phenomenon of economies whose industrial bases suffer when large deposits of energy, such as oil or natural gas, are found. The magazine named it "Dutch Disease" because of the rapid deindustrialization seen in the Netherlands in the years after a major offshore natural gas find in 1959.
One of the effects of becoming an energy-exporting country is that speculators will start treating that country's currency as a "petro-dollar." The value of the currency rises (and sometimes falls) with the cost of the country's energy exports, which often means it becomes too high in value for exporters in other sectors. Those exporters then see their sales decline, and manufacturing suffers as a result.
As the energy export sector grows, it attracts workers from other sectors, including manufacturing, leaving fewer skilled people to fill jobs in those areas. This is known as "direct deindustrialization."
The Spending Effect
As money flows to the energy exporters from energy consumers around the world, it increases the amount of spending cash people have. That additional cash increases the demand for non-manufacturing labour -- things such as beauty salons, travel, entertainment -- which in turn sends people into those jobs, and away from manufacturing. This is known as "indirect deindustrialization," or "the spending effect."
Economists are in disagreement about whether Dutch Disease is real, whether it's an important phenomenon, and whether it actually happened in any given economy. Fifty years after the Netherlands' big natural gas find, there is no consensus on whether the country experienced the disease named after it, with many economists arguing excessive social spending was behind manufacturing's decline.
The Canadian Debate
In Canada, Dutch Disease has become a highly polarized political issue. When NDP Leader Thomas Mulcair and Ontario Premier Dalton McGuinty recently referred to what they see as the problem of manufacturing suffering under the weight of a booming oil industry, it prompted accusation of divisiveness from leaders of Western provinces. Economists don't agree either. While a recent study from the Pembina institute argues the phenomenon is real and having a negative impact, others argue the strength of Canada's oil sector is creating internal demand that's offsetting the loss of manufacturing exports. Yet others say Dutch Disease is only a part of the problem, and that other factors -- like offshoring of jobs to developing countries and increases in productivity -- are also to blame for manufacturing's decline.