COLUMN: Robson – Mulcair is plain wrong on Dutch Disease claims

- June 18th, 2012

Dutch disease not a Canadian problem

by John Robson

Thomas Mulcair’s attacks on Canada’s energy industry may not make much political sense. But they’re certainly bad economics.

His environmental complaints are also unsound. But one error at a time. Let’s start with the idea that the oilsands are pushing up the Canadian dollar and hurting manufacturing, giving us so-called “Dutch disease”. In the 1970s, exported North Sea oil pushed up the value of the pre-Euro guilder currency in Holland so much it priced other Dutch goods and services out of international markets and wrecked the Netherlands’ economy. Thus the term. But it cannot really be true that getting richer can make a country poorer.

Let’s walk Mulcair through it.

First, when more oil is produced there’s more energy in the country to light and heat our homes and offices, move us around and power our industry. That’s good. True, some food, machinery, engineering and accounting skills, etc. are used up producing it. But the extra oil pays for that with lots left over, so the country as a whole is richer.

At first it might seem the whole benefit goes to the workers paid to extract the oil and the companies who then sell it at a profit. But it doesn’t. As in all markets, buyers benefit too, because if they did not value the oil more than the money they paid for it they would not have bought it. It’s why you and the grocer are happy when you buy food.

It’s also why Canadians are already happy they can buy gas. (Sure, we grouse about the price, but if you go to a gas station and they’re out, are you relieved?) And when the oilsands make more energy available, it becomes slightly easier for everyone to afford the good things energy brings, leaving them a bit more to spend on everything else.

This happy picture is suddenly spoiled, we’re told, when foreigners barge in bearing Dutch disease. But how? Foreign, like domestic trade, consists of a person selling something they have more of than they need to someone who has less than they need and both are better off.

The only difference is money or, more precisely, currency. Unlike Canadians who already live their lives in Canadian dollars, foreigners cannot buy our oil, cars or anguished novels unless they first buy our dollars with bits of coloured paper showing dead foreign politicians or imaginary bridges. Just as we cannot buy theirs unless we first do the reverse.

So what? Well, according to the Mulcairs of this world, instead of spending the Euros or renminbei, we might just pile them up because we’re selling so much darn oil we can’t or won’t buy foreign stuff fast enough.

It’s not obvious why we would do this. And looking at the shelves of Canadian stores it’s pretty obvious we’re not. But if we did, foreigners would find Canadian dollars harder to get and would give us more of their bits of coloured paper for each one. So our currency would go up in price.

As it did, all Canadian exports would cost foreigners more. And then they would buy less of those products until the value of what they were buying from us fell to the value of what we were buying from them. But since all Canadian exports would rise in price, it wouldn’t cause foreigners to shift from cars to oil or anything else.

Of course they would buy more of what was relatively cheap coming from Canada and less of what was relatively expensive. But they do that anyway. Like all shoppers, they’re bargain-hunters. And we’d concentrate on what we’re relatively best at. But we do that anyway. It’s called specialization and has nothing to do with oil or currency appreciation.

By the way, if you think the oilsands aren’t a manufacturing operation you haven’t looked at the physical plant or giant trucks very closely. Besides, manufacturing has been declining throughout the Western world for decades as a share of output, regardless of who found what oil where, for reasons from forced unionization to Asian industrialization to beneficial specialization.

Dutch disease? There is no cure … because there is no illness.

Categories: Contributor Columns

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1 comment

  1. Bill Elder says:

    I don’t think it’s the matter of how dead wrong he is, or how narrow and isolated his views are, or even that he has an ideology comprised of the world most confuted and failed ideas – what bothers me is why this angry, morbidly obsessed little man is given excessive exposure and credibility by the media?

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