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Daniel D. Veniez

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Mulcair's Ploy to Spread (Dutch) Disease

Posted: 05/18/2012 10:57 am

NDP leader Thomas Mulcair's recent meditations on an economic phenomenon known as "Dutch Disease" illustrates again that NDP and their new leader are far from ready for prime time.

Western Premiers and others have characterized Mulcair's comments "divisive." Indeed, they are. They are also cynical and profoundly ill-informed. Although I don't believe he is "goofy" as Premier Christy Clark has said, his foray into economic thought betrays an utter ignorance for how the wheels of the economy turn and how our high standard of living is actually created.

Saskatchewan and Alberta have become robust economic engines, largely based on the foundations of their respective resource sectors. Because of that foundation, their economies have grown and expanded into a variety of related and unrelated areas. Real wealth has been created that has benefitted the entire national economy. Newfoundland and Labrador has done the same thing. From the poor child of Confederation, it is today the shining rock on the Rock.

For months, Mulcair has been saying that Canada "fits the textbook definition of Dutch Disease." No it doesn't. Among others, Bank of Canada governor Mark Carney and Jack University of Calgary economist Jack Mintz don't believe the term applies to Canada. In fact, many economists from The Netherlands don't believe that this so-called "disease" ever really existed there, either.

"Dutch Disease" strikes when foreign demand for an export drives up the exchange value of the exporting country's currency. This increase in the currency's value makes the nation's other export products less competitive.

There can be no question that a strong commodity pull from China has been a factor in driving up the value of the Canadian dollar. But the evidence is inconclusive as to whether this is the primary factor, however.

In fact, there are many others, including Canada's relatively strong fiscal position and balance sheet, political stability, not to mention the ease with which currency speculators trade on a global basis. We should also keep in mind the dollar has been trading at historic highs relative to the United States, which has seen its currency steadily decline to historic lows.

Canada's rich and abundant oil and gas, coal, metal, minerals, and timber endowment is not a curse, and certainly not a "disease." It is a blessing and comparative advantage. These are assets that must be carefully and strategically managed and nurtured.

Unlike most OPEC countries, for example, Canada's economy is broad and diversified. Less diversified and developing countries are far less equipped to ward off "Dutch Disease." By contrast, Canada is a democracy, where that system and tradition is strong, and so too is the market economy -- for the most part.

That does not mean that there is not a kernel of truth in Mulcair's statements. But like most demagogues, that tiny morsel is being cynically deployed to appeal to pre-conceived ideological prejudices and partisan purposes. Unfortunately, Mulcair is not acting like anyone hoping to be a national leader must. He is shamelessly kowtowing to his base that believes the dreaded "tar sands" should be shut down completely.

That's not about to happen, nor should it.

Canadians can walk and chew at the same time. A strong currency is a desirable thing, overall. For manufacturers and other businesses, the steady rise of the dollar since 2003 forced them to drive innovation and cost competitiveness. It has certainly not been easy, but it has been a necessary and vitally important thing for them to do.

There's absolutely nothing preventing us having a thriving resource sector while growing other facets of our broad-based economy, including manufacturing. In fact, they can and should complement each other and are far from mutually exclusive.

But to do that, we need policy makers who understand what is required to create the conditions that lead to attracting new investment and make capital formation easier. Those are low taxes, increased competition and trade, world-class education and health care, and a smart and efficient regulatory regime. This is what fosters innovation, entrepreneurship, and productivity. And that is what also creates a larger tax base, creates new high-skill and high-paying jobs, and enhances our standard of living.

There's a reason why we export our resources raw. Federal and provincial policy and regulations have made it impossible for greenfield projects -- such as oil refineries and pulp mills, for instance -- to be financed and built on an viable economic basis. If that were not the case, capital would be drawn to them and facilities would be built. If capital markets and entrepreneurs believe there's a buck to be made, you can be sure of this: they will come in droves.

In British Columbia, the last NDP government hurt the forest economy through its exceptionally high economic rents, oppressive regulations, and hostile investment climate. Unions got greedy and militant in protecting their "entitlements" and "gains" from previous collective agreements. Managements got lazy and complacent. Logging contractors enjoyed their legislated and uncompetitive cost-plus contracts.

The province, more concerned with safeguarding their revenue streams from stumpage and license fees, kept collecting from an ever-dwindling pool. Communities that for decades relied on obscenely high property tax rates for pulp, paper and saw mills refused to see that they were contributing to sucking the life out of firms, preventing them from re-investing in new productivity enhancing technologies. And First Nations, with claims on all the crown land, were left in limbo. The economic uncertainly that came with a lack of clarity on property rights due to a refusal to deal with treaties was the nail in the coffin.

Investment dollars vacated or took a pass to go elsewhere and build what should have been built right here in Canada.

In his thoughtful memoir The Age of Turbulence, Alan Greenspan wrote "natural-resource wealth often has crippling social effects. Easy, unearned wealth tend to dampen productivity." Indeed it does, if we let it. And that's precisely what Mulcair's prescriptions would do. We've seen this at work before in B.C.

So, if one wants a glimpse at what an NDP government under Tom Mulcair would do, they should look no further than what their brothers and sisters did to the B.C. economy. The NDP shattered the resource, processing and manufacturing sector for a generation, destroying tens of thousands of jobs and gutting communities. It took a decade to reverse the damage that was done. And we are still not out of the woods.

 

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