Manufacturing AUTOMATION

Oil not responsible for manufacturing decline, Carney says

September 7, 2012
By The Canadian Press

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 Thursday 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 get in more on the bounty by building pipelines and refineries to where the markets are in Ontario and Quebec.

“Higher commodity prices are unambiguously good for Canada,” he told a conference of business leaders and international policy-makers in Calgary.

“The strength of Canada’s 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.

But Carney said the analysis is simplistic and only partly explains the decline of Canada’s factory sector.

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.

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