Canada’s economic future and the Dutch Disease theory
February 26th 2015 | New York | Alex Shapiro
Photograph by BBC
President Obama made true his promise to congress that he would veto the Keystone XL Pipeline bill should it come across his desk. The president stated that “through this bill, the United States Congress attempts to circumvent longstanding and proven processes for determining whether or not building and operating a cross-border pipeline serves the national interest”.
Elizabeth Warren, Senator of Massachusetts for the Democrats, questioned why the Keystone bill was the number one priority on the agenda for the new 2015 GOP congress and which interests were really being served. Based on research done by Politico and by Burdett Loomis, a political scientist at the University of Kansas, Warren argued that the Keystone XL Pipeline bill was simply a “lobbyist support act”. In other words, it would disenfranchise anyone who is not connected to an oil plutocrat. “It just won’t do much to help the American people,” said Warren, “but it is worth a whole lot to the Canadian oil industry.” As a matter of fact, TransCanada has spent more than $7 million dollars in lobbying expenses alone related to the Keystone since 2009.
Obama’s concern that the pipeline would not serve the national interest is right on the money. The bill would have allowed TransCanada Corp. to deliver its product through the Keystone XL Pipeline to the Gulf of Mexico, which is a tax-exempt area. The oil would then most likely be exported overseas, not benefitting America’s energy costs or contributing directly to American cleanup funds.
What about Canada?
As Tom Mulcair, Leader of the New Democratic Party of Canada puts it, “the Canadian dollar is being held artificially higher [by the demand for oil], which is fine if you’re going to Walt Disney World, not so good if you want to sell your manufacturing product.” This problem of an inflated currency is a symptom of a larger problem in economics called the Dutch Disease.
Economists coined the term in the 70s to describe how the Netherlands ruined their manufacturing sector in the late 50s by heavily exporting natural gas. In such scenarios, a booming natural resource sector drives up the exchange rate, thus making it more difficult for other countries to afford the relative cost of their exported products. The manufacturing and agricultural sectors, in essence, are hollowed out by the pull of the resource boom, and, in turn, the economy’s driving force ends up being a basket with too many eggs. Canada’s economy is not diversified enough, which means it may struggle to be competitive in world markets once it can no longer rely on oil exports.
Currently, there is a pipe factory in Camrose, Canada, which sits right across the street from the pipes installed for the Keystone XL pipeline. Yet, those pipes were made in China. Gil McGowan, president of Alberta Federation of Labour indicated that “Canada’s own manufacturing sector cannot compete to support it’s own industry”, and that they now have “18,500 fewer manufacturing jobs, here in Alberta […] than we did 10 years ago”.
When a nation mostly exports oil and relies on imports for manufacturing and agriculture, it is essentially exporting jobs. For that matter, Canada will lose much more in manufacturing and other sectors than it could gain in the oil sands. Simply put, a shift in Canada’s economy to the extraction of non-renewable resources is not sustainable in the long-term.
The other side of the story
Despite its apparent downsides, Republicans have repeatedly argued that the Keystone XL Pipeline project would create thousands of American jobs in the energy and construction sectors – boosting opportunity for growth in coming years.
With regards to the Dutch Disease, Dylan Jones, President and CEO of Canada West Foundation, did make some interesting counter-arguments. He pointed out that although the Canadian manufacturing sector “dropped 23%”, from 2002 to 2011, the exact same thing happened in the United States, a country that is not a key petroleum exporter. He argues that the manufacturing in both countries has been reduced not because of the oil industry, but because of “low cost competition from China, Vietnam, Indonesia, and other countries” and “lower global demand in the developed world for stuff, caused by financial and economic crises and an aging population”.
The National Post also drew attention to this by saying that the bulk of Canada’s currency gains were made in 2007 when it shot up 27% against America’s dollar, but it only made up about half of that against the Euro. This was against the backdrop of America’s biggest financial disaster since the great depression. The Institute of Research and Public Policy in Canada realizes this, but still concedes that there was a real output problem in the textiles and leather products industries in central Canada, and that the transportation and food sectors experienced a smaller effect of Dutch Disease.
The Keystone XL Pipeline consigns Canadians to an industry here today, gone tomorrow. This is a palliative for a larger problem: we are all energy junkies.
On January 19th, 2015, the Bridger Pipeline Co. spilled up to 50,000 gallons of oil into the Yellowstone River. Although more will need to be investigated, this is clear proof that environmental disasters are always a possibility, and they will happen time and time again. Regarding the Keystone Pipeline: water pollution, carbon emissions, potential oil spills, and site remediation issues are still substantial concerns which remain to be concluded. As President Obama put forth, the bill “cuts short thorough consideration of issues that could bear on [America’s] national interest – including our security, safety, and environment”.
The world, not just North America, needs to invest in clean, safe, and renewable energy. We need energy that does not pollute or distract from the vitality of the economy. Naturally, this cannot happen overnight, but it definitely will not start with a pipeline from Canada either.