The Oil Sands Wedge: Could The Next Federal Election Be A Fight Over Dutch Disease?

Spencer Keys
April 9, 2012

February’s spat between Premiers McGuinty and Redford, about whether the oil sands have contributed positively or negatively to Ontario’s economy, has given national prominence to the spectre of Dutch Disease in Canada. The story is a simple one: a resource boom links the value of the national currency to resource prices; high resource prices change the terms of trade with other nations, lowering the value of exports to other countries because of currency inflation; and export-dependent manufacturing stagnates, leaving the economy even more dependent on high resource prices and creating economic collapse if/when resource prices drop. What is interesting is how different actors are beginning to embrace or reject this story to further their interests.

At first glance, it is easy to see Premier McGuinty’s concern: manufacturing has been declining in Ontario while the loonie has steadily risen from a low of $0.63 in 2002 to its current level around parity. There’s a prima facie case this is bad for both Ontario and Canada as a whole.

However, there is neither consensus on the scale of the problem nor on whether a problem exists at all. Recent statements by Canadian economists show the significant divisions on this topic. Arguments about the size and scope of the public sector, while not directly related, establish one classic left-right division. Andrew Jackson argues Canada’s petrodollar has become a major cause of reduced manufacturing, while Erin Weir identifies the avoidance of Dutch Disease as a reason for extracting higher public revenues from resource projects now, to support robust state activity. Meanwhile on the right, University of Calgary economist, low corporate tax and anti-subsidy advocate, Jack Mintz argues these are solutions without a problem because Ontario’s manufacturing decline tracks most closely with a 30-year trend of manufacturing decline throughout North America, and genuine Dutch Disease would have to have seen a reciprocal rise in manufacturing in the late 1990s, as the value of the loonie dropped, which didn’t occur.

Environmental groups have jumped firmly on the Dutch Disease bandwagon. After the premiers’ dueling talking points, both Greenpeace and Environmental Defence posted critiques of Premier Redford’s view that the country is generally experiencing a benefit from the oil sands. Their interests are clear: if the economy is the overriding concerns for Canadians, promoting the idea that the oil sands are quietly undermining the economy may be a more successful strategy to slow oil sands growth than appeals based on the environmental merits alone.

Interestingly, Canadian political rhetoric is only now latching on to this narrative. In the 40th Parliament and the 41st Parliament, Dutch Disease has been referenced in Hansard on only three occasions, including one speech by new NDP leader Thomas Mulcair. However, given the 2011 election created an unprecedented coalition for the Conservatives between Ontario and the western provinces, focusing on a story that shows the tension of that coalition makes strategic sense. Mulcair is already highlighting that tension through his comments on the oil sands, talking about the need to develop a framework of “sustainable development” that keeps the dollar from inflating for the benefit of manufacturing and the environment. With one policy he can speak to the fears of labour and green constituencies, primarily in urban and suburban Ontario ridings, while trying to avoid a “radical” label from centrists.

It is unsurprising that this debate continues to reflect the framing strategies Hoberg and Rivers have previously identified. Both sides have had ideologically affiliated economic and business leaders speak out, from Robyn Allan on the left to Dr. Mintz on the right. Both proponents of the Dutch Disease narrative and its critics have focused on their preferred criteria: Greenpeace voices concern over the kinds of jobs being created and the effects of those jobs on the environment, whereas some like Laval University economist Stephen Gordon do not see the switching of jobs and capital to another sector of the economy as inherently problematic in the aggregate. Even the phrase “Dutch Disease” is a method of both drawing an unfavourable comparison to the Netherlands in the 1960s, and labelling the scenario unfavourably to imply a problem despite a decent counterargument that the overall increase in wages and shift of capital has produced a net economic benefit.

Whether or not Dutch Disease is happening in Canada, it’s a powerful concept that will continue to plague conflicting interests. And ultimately, because the phenomenon cannot be conclusively said to have occurred until there is a broad economic stagnation, it will be difficult to prove or disprove until it is too late. That feature, similar to the inability to categorically state the the long-term effects of climate change, makes Dutch Disease both an emotional topic and one that is unlikely to resolve itself purely through analysis. If anything, some recent analysis suggests that Dutch Disease is part of the manufacturing decline, but far from the majority of the cause, rendering conclusions about the value of oil sands expansion on economic terms even more difficult to determine.

What is likely is that, as the tension between oil sands expansion and manufacturing decline continues to hang over decision-makers, the Dutch Disease story will become a more prominent part of the policy space. In particular, it is worth monitoring whether this becomes a more significant aspect of environmental advocacy, as environmental groups seek to create a broader political coalition by reframing the oil sands conflict, or if it remains a supportive but ultimately tangential component of the climate action dialogue.

Spencer Keys is a student at the University of British Columbia and a public affairs consultant. He can be found on Twitter @spencerkeys.

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3 Responses to The Oil Sands Wedge: Could The Next Federal Election Be A Fight Over Dutch Disease?

  1. Milan says:

    There is a longer-term economic issue here.

    If mainstream climate science is right, we should start seeing very serious climate effects within the next few decades.

    At that point, major countries like the US and China may start finally taking climate change seriously. If they do, a necessary action is to reduce their usage of fossil fuels.

    Canada may build billions of dollars worth of oil sands infrastructure, then discover that the world is (intelligently) refusing to buy the dangerous fuel.

    Then we will have wasted billions on the wrong infrastructure, worsened the impacts of climate change, and given ourselves less time to transition to a low-carbon economy, raising costs.

  2. Pingback: Mulcair Goes West, Giving Canadian Climate Hawks a New Dilemma | GreenPolicyProf

  3. Pingback: Dutch disease can be a form of persuasion for environmentalists | ENV 350: Energy Policy and the Environment

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