Resources (“staples”) trap is Canadian Disease

Cure is to tax bitumen and fund a dividend to every Canadian.

by Mel Watkins

Everybody's using the term "Dutch Disease." Actually, we should be calling it the "Canadian disease."

So-called Dutch Disease occurs when resource exports push out other activities, like manufacturing. The name Dutch Disease arose because Dutch manufacturing lost export sales after the discovery of North Sea gas for export in the 1970s and 1980s.

We've all learned that history lesson in recent days — thanks in particular to NDP leader Tom Mulcair — as we've watched resource exports from the West, particularly bitumen from the oil sands, crowd out manufacturing in the East. (Actually, it crowds it out everywhere, including in Alberta — a point too rarely made — as an appreciating [rising] Canadian dollar encourages Canadians to prefer imports to Canadian produced goods.)

 

To know our history is to know that exports of resources have been the staples of our economy since the days of the fur trade and the cod fisheries when what is now Canada became a hinterland of Europe. Canadian economic historians have written the story of our economic growth around a succession of staples. Along with Canadian political economists, they have developed a staple theory of economic growth that describes how resource exploitation creates linkages that spread through the economy.

They have likewise noted the blockages, the powerful tendency for Canada to persist as a staple-based economy, and they have called that inability to transform and become a truly mature economy the "staples trap."

Business elites and governments become beholden to the interests of the resource industries to the neglect of the rest of the economy. Call that the Canadian disease, for we were there a half a millennium ago.

Not only does specializing in staples create a bias, but each staple leaves its own stamp on the economy, the polity, the business culture. There is a vast literature which gives oil low marks in most countries relative to almost any other commodity. The coming of climate change has only worsened its reputation.

Let's clarify one thing immediately. In terms of per capita income, Canada has prospered compared with much of the world. Having resources is a matter of luck, and Canada has been lucky.

But resources tend, first and foremost, to benefit the region where the resources are. This situation risks uneven rather than balanced development. Significantly, an OECD report last week on the Canadian economy saw this imbalanced development as contributing to higher levels of unemployment and a less equitable distribution of wealth between regions. (National unity is undermined by that, not by those like Mulcair, who point it out.)

Dutch Disease itself is transmitted by the appreciation of the currency, so let's just note that the OECD calculates that the Canadian dollar would currently be at 81 cents relative to the US dollar, rather than hovering around par, were it not for high commodity prices, such as for oil.

What might be done to mitigate this problem? Mulcair has put forward an ingenious solution so far as bitumen is concerned. The oil sands are a humungous contributor to carbon emissions and hence to climate change. As brilliantly put by Carleton University's Brendan Haley, our staple trap has morphed into our, and the world's, carbon trap.

This very real pollution cost is not included in the market price, and for that, we are all paying dearly. This failure of the market should be corrected by increasing the price of bitumen accordingly. Indeed, market advocates like Harper should welcome this as improving the efficiency of markets.

The higher price would lessen the volume of exports, simultaneously reducing environmental damage and very likely tending to mitigate the adverse impact on manufacturers. (That is, the price of bitumen will rise. This will reduce the quantity demanded; if that quantity is sensitive to price, the value of bitumen exports will fall and the Canadian dollar will depreciate.)

How could one deal with the charge, bound to be made by the Harper government, that this would be a tax grab by a tax-and-spend government? Return the proceeds of the tax as a dividend to every Canadian resident. We deserve as much in these hard times.

It is, of course, in the nature of the staples trap in which Canada has long been mired that those with power will powerfully resist all this good sense. Which is to say that the good rarely happens without a struggle.

© Copyright 2012 Mel Watkins, All rights Reserved. Written For: StraightGoods.ca