Thank you.
It took the English-speaking economic community in Canada over ten years to properly pronounce my name. It was not easy.
In the few minutes I have here today, I would like to address two subjects. The first is the issue known as Dutch disease, in the Canadian context. The second subject has to with the relationship between oil and gas development and regional increases in productivity.
With respect to Dutch disease, the name comes from an article published in The Economist in the 1960s regarding the Dutch economy. The Dutch manufacturing sector suffered considerably following the discovery of oil and gas in the North Sea. Several theoretical and empirical studies were then conducted. To put it in extremely simple terms, Dutch disease results from the relationship between a booming resource sector and the manufacturing sector.
A booming resource sector leads to rising production costs and an appreciation of the national currency. That is what happened in Holland's case and in many other countries like Australia, Norway and Canada. This increase in the value of the exchange rate decreases the competitiveness of the manufacturing sector.
In Canada, Dutch disease has a very particular regional dimension because, generally speaking, the resource boom is in Alberta and Saskatchewan. The secondary sector, manufacturing, is in Ontario and Quebec. Australia is facing a similar problem.
For instance, during the resource boom of 2002-2007, Canada lost approximately 275,000 manufacturing jobs. In a study I did with some European colleagues, we estimated that approximately 50% of these job losses in the manufacturing sector were caused by the impact of the resource boom on the value of the Canadian dollar.
Clearly, the question we must ask ourselves is this: Is Dutch disease really a disease—a bad thing—or is it simply a question of labour market adjustments? When there is a boom in one sector, jobs must come from elsewhere.
I would now like to quote Mr. Krugman, the 2008 Nobel Prize winner in economics. When he was an economist, and not a journalist, he said: “The worry seems to be that when the natural resources run out, the lost manufacturing sectors will not come back.”
As far as Canada is concerned, it is pretty clear that our oil and gas resources will not run out any time soon. One way to address this problem would be to significantly drop the price of oil, for instance, in the medium and long term. This could also create a problem like the one Krugman describes.
It is worth noting that Canada's manufacturing sector has not always been depressed by the resource sector. Prior to 2002, for about six years, the opposite effect was noted. With a drop in the cost of raw materials and a decline in the value of the Canadian dollar, many jobs were created in Canada's manufacturing sector.
The basic problem with the relationship between Canada's resources sector and manufacturing sector is that there seems to be excessive volatility in the manufacturing sector. This excessive volatility stems from how natural resources affect the value of the Canadian dollar. Thus, it is pretty clear that Ontario and Quebec benefit from having a more stable currency that does not depend on the uncertainties of the recourses sector, therefore, a currency like the euro or American dollar.
My second point pertains to certain facts from a study I am currently preparing for the C.D. Howe Institute on the relationship between Canada's resources sector and regional productivity.
In the study, I compared the strong growth of resources in Newfoundland following Hibernia, so Terra Nova and White Rose, and the growth in Alberta.
Note that productivity in Newfoundland has seen the largest improvement in Canada in the past 25 years, and this is mainly because of changes to the economy's structure. I am summarizing and simplifying, but we have gone from a very low-productivity resource, fish, to a very high-productivity resource.
In contrast, Alberta has seen among the lowest growth in productivity in Canada. Since 2002, productivity growth has been relatively weak in Canada. Note that the level of productivity is still very high, but the growth has been very weak. Basically, this is because we have moved away from oil production using normal standards with relatively high productivity. That source has been partially used up and there is growing reliance on extracting oil from the oil sands, which requires more labour and very high production costs.
I have provided a graph that shows both productivity measures. The graph shows that the oil boom has caused extraordinary growth in productivity in Newfoundland, while productivity in Alberta has actually decreased.
When we look at what is going on in the economy as a whole, we again see the opposite effect. It may seem a little surprising, but in Alberta, productivity growth has been extremely strong in sectors other than natural resources since 2002. Thus, the resource boom in Alberta appears to spread more easily to the other sectors of the economy, while this has not at all been the case in Newfoundland.
So that is basically my second conclusion for you here this morning. We must not assume that oil and gas development will always have the same effect on regional economies. It basically depends on the type of resource.
Thank you.