CALGARY - Canada's reliance on oil is "unambiguously good" for the country as a whole — not just the West — Bank of Canada governor Mark Carney said Friday in a speech that called for more pipelines and dismissed fears about so-called Dutch disease.
Rather than blame high-priced oil and other commodity exports for the decline in manufacturing, central Canada should seize more of the bounty by building pipelines and refineries to where the markets are in Ontario and Quebec.
"Higher commodity prices are unambiguously good for Canada," Carney told a conference of business leaders and international policy-makers in Calgary.
"The strength of the Canadian resource sector is a reflection of success, not a harbinger of failure."
Canadians should find new ways to take advantage, said Carney. He points out that eastern Canadian consumers are importing oil at prices that average $35 a barrel more than what western heavy oil producers receive.
"New energy infrastructure — pipelines and refineries — could bring more of the benefits of the commodity boom to more of the country," he said.
The central bank governor has spoken out before against critics of Canada's dependence on natural resources, particularly as rising demand from emerging markets in Asia have caused prices to rise, and the Canadian dollar to climb to and past parity with the U.S. The flip-side has been that manufacturers have found it difficult to cope in foreign markets, a phenomenon dubbed as Dutch disease.
NDP Leader Thomas Mulcair this year blamed the dynamic for the decline in central Canada's manufacturing sector, since their exports have become uncompetitive in global markets.
"Its a very tidy argument that's appealing. Making commodities the scapegoat is tempting. But in the view of the Bank of Canada, it's an overly simplistic assessment and in the end it is dead wrong," said Carney.
"Our economy is much more diverse and much better integrated than the Dutch disease caricature."
He acknowledges that high commodity prices have lit a fire under the loonie, contributing about half its appreciation over the past 10 years. Meanwhile, manufacturing as a share of the economy has fallen from 18 per cent to 11 per cent today.
However, he points out that Canada's experience is shared by many advanced countries, including those without resource riches, and that exchange rates only partly explain what is occurring. And there has been an offset, he added.
"It is important to recognize that, for almost all the provinces, trade inside Canada has grown fast enough to offset a significant portion of the declines in international trade," he said.
"Central Canada suffered a real decline in international exports of $18 billion between 2002 and 2008, which was almost entirely offset by increases in interprovincial exports of $16 billion."
Some of the increase reflects sales of central Canadian machinery makers, primary metal producers and chemical companies to feed Western Canada's resources boom.
More importantly, he says exports of oil and other commodities have brought greater wealth into the country, including generally higher incomes and greater economic activity.
Carney also dismissed calls for him to intervene in the currency market to devalue the Canadian dollar, which now trades above parity with the U.S.
In the short-term, that could indeed help exporters of manufactured goods compete, he said, but ultimately the effort would be futile since over time wages and inflation would need to rise, putting manufacturers back into the same uncompetitive territory.
"The cost of this misadventure is lower output of about one per cent and higher volatility in inflation, output and employment than when the exchange rate is allowed to do its work," he said.
Related on HuffPost:
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.