Canada Stricken With Dutch Disease

A blog about business and economics.
Aug. 15 2012 1:27 PM

"Dutch Disease" in Canada

I remember that years ago when I visited Maine I'd hear all about locals who would deliberately travel to Canada to buy things. The issue was that the Canadian dollar was weak compared to the U.S. dollar, leading to low wages for Canadians and therefore some cheap prices in some labor-intensive industries. In effect Canada was exporting retail services to Maine. But this was only of limited economic relevance, because while a large share of the Canadian population lives near the U.S. border, few Americans live near the Canadian border.

Yet the same trend in reverse is now impacting the North American auto industry, where for a long time the "Detroit" supply chain has been partly in Ontario, Canada. In recent years Canada's been riding a wave of high natural resource prices and strong resource exports. That's pushed the value of the Canadian dollar up, making Canadian wages high and turning Canada into a pretty unattractive location for auto-parts manufacturing.

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This phenomenon whereby resource wealth crowds out domestic manufacturing is known as "Dutch Disease," though I believe it's never been entirely clear whether the Dutch actually suffered from it. The other thing that's never really been clear is whether this disease is an actual problem. If it's cheaper for Canada to get manufactured goods by employing labor in natural resource extraction and then trading resources for manufactured goods, then maybe that's what Canada should do. After all, any given place is bound to specialize in a few things. Why shouldn't resource extraction be one of them? In an economic development context there's a pretty clear case that the disease really can be a problem. Export-oriented manufacturing facilities can be a mechanism for the transfer of technology and know-how. Even a very lowly factory gets you on the ladder of economic development in the way that a mine arguably doesn't. But it's much less clear that this logic applies to an advanced economy such as Canada's.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.