Reference no: EM133336745
Assignment: Our manufacturing sector is suffering from the expensive loonie imposed by the Alberta oil boom. It is said that a country suffers from Dutch disease when a resource boom leads to a manufacturing downturn. The term was coined after the natural gas boom in the Netherlands in the 1960s. Today in Canada, it can be said that the manufacturing sector in Ontario, Quebec and the Maritimes is suffering from Dutch disease as a result of the Alberta oil boom. The trigger was the surge in world oil prices that began in 2002, which made the Alberta oil sands profitable. The table below shows the consequences
|
Consequences
|
2002
|
2014
|
|
The price of a barrel of oil explodes...
|
From 26$ US
|
to 98$ US*
|
|
... which increases the value of the Canadian dollar
|
from 0.64 $ US
|
to 0.91$ US*
|
|
Quebec's exports to the United States suffer and go from...
|
From 22% of Quebec's GDP
|
to 13% of Québec's GDP
|
|
... which causes job losses in Quebec
|
18% of total jobs are in the manufacturing sector
|
12%* of total jobs are in the manufacturing sector
|
The first row shows that West Texas Intermediate oil prices and go from $26 per barrel in 2002 to an average of $98 from January to September 2014. Development in the West has caused a massive influx of foreign capital into Canada. Our oil exports have soared. But to buy in Canada, as well as to invest in Canada, foreigners needed a lot of Canadian dollars. As a result, demand for the loonie surged and the Canadian dollar's exchange rate appreciated significantly.
The second row of the table shows that it is worth 42% more today than it was 12 years ago. From $0.64 in 2002 its value averaged $0.91 from January to September 2014.
Naturally, a 42% more expensive loonie means that Americans must pay 42% more for Canadian manufactured goods today. The appreciation has therefore severely damaged the competitive position of our manufacturing companies. The consequence of this loss of competitiveness is visible in the third row of the table. After having been stable around 22% of GDP from 1996 to 2002, the weight of Quebec exports to the United States has now dropped to 13% of GDP. The dreadful American recession of 2008-09 and the subsequent weak recovery have added to the woes of our exporters.
The fourth row of the table tells the story. With our manufacturing sector producing and selling far less than it used to, the share of manufacturing employment in total employment in Quebec has collapsed. In 2002, 18% of Quebec workers were employed by manufacturing companies. In 2014, this percentage is only 12%. This is even worse than in other provinces where manufacturing employment is only 9% of total employment.
A group of researchers led by Professor Serge Coulombe of the University of Ottawa recently demonstrated that two-thirds of the decline in Canadian manufacturing employment since 2002 can be attributed to the Dutch disease triggered by the Alberta oil boom. Reflecting on this, Canadian economist Robert Mundell (Nobel Prize 1999) once lamented that Eastern Canada does not have its own separate dollar. In the episode we have been experiencing since 2002, a simple depreciation of the Eastern Canadian dollar against the Western dollar would have cured us of the Dutch disease.
That's the way it goes: In North America, the orientation of economic exchanges is mostly north-south, but 150 years ago the Fathers of Confederation wanted to build the country in an east-west direction. A beautiful big country, but you have to live with the consequences
E) Has the value of the Canadian dollar appreciated or depreciated and why?
F) In conclusion, give your opinion from an economic point of view on this article