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Tuesday, October 18, 2005

Is the Dutch Disease Coming to Canada?

From Steve Poloz at Export Development Canada:

In theory, Dutch disease can be contracted by any economy that produces a key resource and has a manufacturing sector, too. Suppose the world price of the resource shoots up, causing the sector to boom. This will generally cause the economy’s currency to appreciate, putting stress on the manufacturing sector. Something like this happened to the Netherlands in the 1970s when energy prices jumped and the Dutch guilder rose – hence the name of the illness. Obviously, the current situation has the potential to inflict Dutch disease on Canada. Oil prices have ratcheted higher in the past year, boosting the Canadian dollar into the mid-80s against the U.S. dollar. While high oil prices benefit some exporters – producers of petroleum, oil and gas equipment, energy exploration companies and engineering firms – others receive fewer Canadian dollars for each U.S. dollar export sale.

Steve concludes:

Symptoms of Dutch disease are beginning to appear, with profit margins expanding in the energy sector and contracting in a number of manufacturing sub-sectors. What happens next depends on how long the stresses last – and that all depends on energy prices.

As a sinecured consumer, I'm happy to see the Canuck buck appreciate. My friend, Jeff, who exports manufactured goods to the US, does not share my perspective.

Posted by EclectEcon on October 18, 2005 | Permalink


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I'm assuming the article refers to the export of tulips as a natural resource and the manufacture of Edam, clogs and guttural words.

Canada's problems will be different. We have oil, gas, gold, uranium and other mined products. Our "self-esteem-centric" school system ensures that we manufacture ignorant grads that know how to fail with confidence.

Our big issue (and the world's) will be when the U.S. walks away from its mountainous debt and adopts the gold-backed "Newdollar." (That'll teach the Europeans to stick the U.S. with the M.E. clean-up bill.)

Canada just needs to be prepared by having its own gold on hand.

Posted by: greenmamba | 2005-10-18 7:52:39 PM

Let's cut the Gordian Knot.
Alberta would be better off without Canaduh.
Canaduh will have a lower currency value without Alberta.

It's win-win!

Posted by: Speller | 2005-10-18 9:14:19 PM

What Jeff probably needs is currency stability, but how could the dollar possibly be stable when the government is printing dollars at a rate twice as fast as their own inflated GDP figures show that the economy is growing? http://www40.statcan.ca/l01/cst01/indi02a.htm

And of course our largest trading partner is the same, or worse. http://prudentbear.com/creditbubblebulletin.asp

The real danger here is the Canadian Disease - massive government intervention in the economy, with rampant corruption and waste tied up in everything done by all levels of government, all of their departments and all of the government-owned enterprises, high taxes and government-induced inflation resulting in a lack of savings and investment in high value added industries, and a ultimately a dependence on the export of a small number of commodities.

Actually this disease already has a name - Banana Republic. And I'm not talking about the store.

Posted by: Justzumgai | 2005-10-19 10:11:51 AM

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