Thank you.
I'm very happy to be able to actually speak on my behalf. I was invited by the Canadian Centre for Policy Alternatives, which found that I had done some work in the area. Although not directly connected to the issue of what's happening to the manufacturing sector, I did do some work with a colleague from the American University in Washington on the issue of monetary integration. In that context I would like to be able to say a couple of things with regard to what's happening right now.
One is that clearly there are some underlying factors that are pushing up the Canadian dollar--some have been highlighted by my colleague here--and needless to say, one of the important ones is oil prices.
On the other hand, you see a lot of volatility. The Bank of Canada has been following more or less a kind of pure float, if you wish to call it that. In fact it has not intervened in the foreign exchange markets for the last 10 years approximately. Perhaps that's for good reasons, but I think here's a situation where maybe we should be concerned about it.
As I said, the underlying factors are oil prices, but I think one should be concerned about the speculative elements as well. I'm one who actually supports the idea of a floating rate. I'm not pushing for fixed, or pegged, or further integration, in any sense of the word. I do think there is some concern right now with the volatility. It does impact on decisions, and it impacts on the bottom line for a number of Canadian firms.
In terms of how to address a problem that is of most concern to the manufacturing sector of central Canada, I have some data. At its peak in 2000, we had manufacturing as a share of total employment at around 15.5%; it is down to about 12% right now. It has been going down in a fairly substantive amount over a fairly short period. One should be concerned about what the economists have traditionally referred to as a kind of Dutch disease that is afflicting our industry.
If indeed this sort of Dutch disease is impacting quite negatively on much of our manufacturing sector, which I believe it is, there are certain things that ought to be done. I would like to propose that we have a three-pronged approach on this.
One is that monetary policy is essential here. By that I mean that interest rate policy should be addressed. A lot of people, especially from the manufacturing community, have been yelling and screaming about that. I think it's certainly of concern, especially in light of what I'm going to tell you right now.
If you look at certain indicators, for example, the overnight rate in Canada, which is pretty much under the control of the central bank, when you adjust for inflation, in 2006 the CPI had reached a bottom. It was pretty much like that until about the summer of December 2007, with a gap vis-à-vis the U.S., which is the federal funds rate adjusted for inflation, of about 50 basis points, so 0.5%.
It stayed like that for a while, but since the summer it has shot up, and in the opposite direction. Now we're above the U.S. rate in the order of about 87 basis points. Surely there's some room to manoeuvre here, especially if you look at the inflation rates in the two countries. In the U.S. it's about 3.5% a year CPI. The Canadian rate was about 2.4% in October, for instance, and if you look at the core inflation rate, it's about 1.8%. So surely there's room to manoeuvre.
I would think that something ought to be done. We can certainly bring it down, if anything, within the range of the gap, which is close to 1%. That's something I would certainly ask that we tackle in some way.
In addition to the interest rate policy, the other concern is that we should intervene in the foreign exchange markets. As I said earlier, since 1998 the central bank has not intervened at all. In this case, I think there should be some concern about it and that the bank at least mitigate the fluctuations. We have no control over the international market for oil, and so on, but surely we should do something to mitigate the impact of the dollar's fluctuations on Canadians, and especially in this case when a lot of it is driven by speculation.
The third thing, I think, is on the fiscal side, and that's the last thing I would like to mention here. On the fiscal side, I think we should do something not only in terms of addressing it with a Keynesian-type policy of trying to increase, let's say, domestic demand when our exports are slowing down, but also, at the same time, in terms of the problems with our equalization formula. If you look at what has been happening and the way it's been debated over the last while, we have essentially been arguing that we should exclude oil revenues from that formula—as Newfoundland and Saskatchewan have been arguing in going to court. Now it seems to me that some principle of compensation should be applied if we look at this situation in the context of where oil revenues are rising, that is, in Alberta, where oil prices are shooting up and causing a paralysis of manufacturing in central Canada. That's the point I would like to make.