Not Dutch Disease, It's China Syndrome

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This paper examines the extent to which the Canadian economy is suffering from 'Dutch disease.' It presents empirical evidence about the degree to which the booming resource sector is affecting the rest of the Canadian economy.

Contrary to expectations, the paper finds that Canada is not in the throes of 'Dutch disease.' Rather, the empirical investigation suggests that the Canadian economy and labour market have proven themselves flexible enough to adjust to a higher commodity price and higher dollar environment. Moreover, although both the Netherlands and Canada experienced a currency appreciation in conjunction with a resource boom, the sources of the boom are distinctly different and are leading to different adjustment paths.

Through its course, the paper examines a number of issues associated with the resource sector boom. They are outlined below.

• What is driving the resource boom and where are its effects manifesting themselves?

The integration of emerging nations, particularly China, and a global economic expansion have led to increased demand for raw materials and falling manufactured goods prices. As a result, there has been an increase in commodity prices, which has created a resource boom. In Canada, the boom is leading to changes in wage growth, relative prices, output, employment and migration. 

The increase in commodity prices has led to more demand from commodity producing firms for labour, and has led to higher wage growth in the resource industries. Part of the additional income that resource workers have earned has been spent on other goods and services, and resource firms have increased investment levels. As a result, income growth has also increased in a number of other sectors, such as construction or finance, insurance, real estate and leasing.

The appreciated dollar, higher commodity prices and falling manufactured goods prices have led to a terms of trade improvement (higher export prices relative to import prices) for Canada. This has increased the volume of imports that Canada is purchasing abroad with its exports. As a result, terms of trade adjusted real gross domestic product (GDP) measures have outpaced real GDP growth because the purchasing power of Canadian earnings has risen faster than the earnings themselves.

The resource boom is leading to a reallocation of employment across sectors. The higher prices of resources are attracting labour while the falling prices of some manufactured goods are leading to lower manufacturing employment. Service sector employment has increased in step with demand. As a result, there is a reallocation of employment from goods to services and from manufacturing to resources.

The appreciated dollar and higher commodity prices have exacerbated the effects of competition from emerging nations in some industries. There have been employment and output drops in areas such as clothing and textile manufacturing, leather manufacturing and pulp and paper manufacturing.

Outside of the automotive sector, which is undergoing a transition due to changes in consumer preferences, many of the durable goods manufacturing industries have increased their output levels since the rise in commodity prices and the appreciation of the dollar. Many of these industries, such as machinery and equipment manufacturers or metal manufacturers, have benefited from the strong investment in the resource sector. They have increased productivity during this period.

Because resources are not equally distributed across Canada, the resource boom has led to increased inter-provincial migration. Alberta and British Columbia have been the beneficiaries of the resource boom while other provinces have seen net out-migration.

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