Canada’s economic diversity is fading, according to a commentary released Wednesday.
“It’s likely that the early days of Confederation were one of the only periods where the percentage of investment dedicated to natural resource extraction was as high, or higher, than it is today,” Will van‘t Veld, an economist with Edmonton-based bank ATB Financial.
Van’t Veld burrowed through data from Statistics Canada to back up his view.
StatsCan says Canada’s mining, oil and gas sector expects to spend $86.9 billion in 2012, an increase of 17.7 per cent from the year earlier.
That investment on getting new projects started and retooling existing ones, represents about 42 per cent of all non-housing business investment spending in Canada, and about five per cent of Canadian GDP.
That compares with about 11.4 per cent of non-housing business investment in 1992.
Broader manufacturing investment has held up well since the recession, despite falling spending on car and truck plants, which plummeted from $4.6 billion in 2007 to $2.2 billion in 2012.
Van’t Veld points out that much of the manufacturing investment came from firms that supply the metal fabrication, machinery and equipment required by the natural resource sector.
In 2007, investment by these types of manufacturers accounted for $2.9 billion, almost doubling to an expected $6 billion in 2012.
The oilsands are the target of a large part of the investment increase, at 31 per cent, but not the biggest.
The largest portion comes in traditional oil and gas extraction, at 42 per cent.
Mineral mining projects represent 18 per cent.
Federal NDP Leader Tom Mulcair has been among several voices that have warned that Canada's economy suffers from a form of Dutch Disease.
Dutch disease is named after a downturn in the Netherlands' economy in the 1970s, when peaking natural gas prices were blamed for driving up inflation and driving down exports of manufactured goods.
Van’t Veld didn't address that in his commentary, but warned that “an increasingly less-diversified economy can pose problems down the road.”
Although strong demand from emerging market demand for commodities could continue for some time, he warned that “the risk to the national economy from a slowdown in investment for any reason shouldn’t be lost on anyone.”
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.