Saturday, June 2, 2012

The Junk Economics Behind the "Dutch Disease" Theory

Far-left response to Dutch Disease theorem short on facts, long on... pretty much nothing

With the far-left doubling down on NDP leader Thomas Mulcair's "Dutch Disease" thesis -- arguing that an artificially high Canadian dollar, allegedly inflated by Canadian energy exports, has hollowed out the manufacturing sector -- it should be far from surprising that the so-called "Progressive Economics Forum" is following the same lead.

Responding to a Glibe and Mail editorial which agrees with Mulcair that the oilsands industry should do more to protect the environment -- they should always be striving to do better -- which attributes their struggle to competition from Chinese manufacturers as much as to a comparatively high Canadian dollar,.Andrew Jackson overlooks a very basic detail.

The PEF's response, written by Jackson, is only four paragraphs long, so it can't help but be short on the facts. While it does offer one fact for consideration, that the Chinese Yuan, like the Canadian dollar, is managed against the US dollar, he actually declines to mention just what the Chinese Yuan-to-US dollar exchange rate actually is.

In fact, as of the time of this writing it happens to be approximately 6.4 Chinese Yuan to one Canadian dollar. This means that it takes approximately 6.4 Chinese Yuan to purchase one American dollar, making US manufactured products very unattractive to Chinese buyers.

Economic analysts cited by the Pembina Institute claim that the "natural value" of the Canadian dollar ranges from 80 cents to 90 cents. If the Canadian and US dollars are at parity, this would put the Chinese Yuan-to-Canadian dollar exchange rate ranging from 5.12 Canadian dollars-to-Chinese Yuan to 5.76. This means that it would take anywhere from 5.12 to 5.76 Chinese Yuan to purchase a single Canadian dollar on the international currency market.

As of May 12, the exchange rate was 6.1 Chinese Yuan to Canadian dollars.

This confronts people like Andrew Jackson with a very stark question: just how far should Canada's dollar be de-valued, and by what means, in order to allow Canadian manufactured goods to gain a competitive foothold against Chinese products, let alone in Asian markets? And what kind of other economic disaster would befall Canada if the dollar were artificially devalued to that extent?

Imagine what would happen to the royalties collected from resource exports, among other things. One thing becomes perfectly clear: whatever the future of Canada's economy, it had best noted by planned by the braintrusts of the Progressive Economic Forum. They're pretty clueless.

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