Western energy vs. eastern industry: a manufactured debate

In recent weeks there has been a recurring debate on whether the economic success being felt in much of Western Canada is hurting the rest of the country. The debate has centred on the oil sands and whether they have caused so-called "Dutch disease", specifically in the manufacturing sector based largely in Central Canada.

The argument that good news for oil sands is bad news for the rest of the Canada is not supported by evidence.

Contrary to widespread opinion, the oil sands are not a significant share of the Canadian economy, and are not crowding out other sectors. Total energy and mining production as a share of Canadian GDP is actually smaller today that it was in recent decades – 4.6 per cent of GDP today, versus 5.1 per cent in 1990 and 5.9 per cent in 1980. Business services – which encompass everything from fast-food to investment banking – are by far the dominant sector in our economy, now representing 54 per cent of GDP.

A detailed analysis of the full benefits of the oil sand production would almost certainly reveal an energy value chain, and related economic benefits, that is focused within Alberta but stretches across the entire Canadian economy, adding to wealth in many other regions and sectors. Oil sands suppliers based in central and eastern Canada and workers from across the country share in the benefits of increased oil sands investment and production.

Although oil sands production of over 1.2 million barrels a day is on a rising trend, Canada's conventional oil production in western Canada has declined over the past decade, so overall oil production has changed only marginally. But global demand and prices for most commodities, including oil, have clearly shifted upwards over the past decade. Commodity prices have risen largely due to the emergence of China and other high-growth markets like India and Brazil, which have added a strong thirst for resources.

The higher value of the Canadian dollar today is driven in large part by higher commodity price trends, but also by the relative weakness of the other major industrial economies, particularly the European Union and the U.S. The forces behind the strong loonie are thus complex. To blame the oil sands for a strong Canadian dollar is far too simplistic. Moreover, the only policy tool that could structurally reduce the value of the loonie would be international capital controls – which would impair the level of investment in the Canadian economy and slow job growth. This policy alternative would be irresponsible.

Next, let's consider the evidence on "Dutch disease". Canadian manufacturing output has rebounded by 14 per cent from the floor reached during the 2009 recession. Not much evidence of Dutch disease there. But Canadian manufacturing is most definitely in a state of change, since manufacturing employment has clearly lagged the recovery in output.

Forthcoming research from The Conference Board of Canada suggests that Canadian exports to the U.S. market are being affected more by increased competition there from Chinese goods and services than by the impact of a stronger loonie. The rise of emerging markets as both competitors and as opportunities is a long-term structural force, and Canadian businesses need to adapt to that reality.

The good news is that many Canadian firms are indeed busy restructuring to become more competitive. Private investment in machinery and equipment, much of which is imported, soared by 13.7 per cent in 2011 as Canadian firms took advantage of the strong dollar to restructure their business operations.

The debate about whether the west's oil sands are hurting central Canada's factories is both misinformed and unproductive. The real issue is how Canada can take full advantage of our natural wealth at a time of higher commodity prices to help create sustainable prosperity for all.

Anne Golden is President and Chief Executive Officer of The Conference Board of Canada. Glen Hodgson is Senior Vice-President and Chief Economist of The Conference Board of Canada.