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Manufacturing Study: It’s not Dutch Disease, it’s China Syndrome

Ottawa, ON -- The Canadian economy doesn't have 'Dutch Disease'; it is in a period of restructuring characterized a...


Ottawa, ON — The Canadian economy doesn’t have ‘Dutch Disease’; it is in a period of restructuring characterized as ‘China Syndrome’, according to a new study released today in the Canadian Economic Observer.

At first glance, the post-2002 boom in commodity prices and exchange rate appreciation in Canada does seem to resemble the events that precipitated Dutch Disease, which refers to the combination of a booming resource sector, a rising currency and a resulting decline in output in manufacturing.

However, the Dutch case involved the discovery of a new resource, while Canada’s recent trend stems from the integration of emerging nations, particularly China, into the global economy. Also, contrary to the Dutch experience, during which manufacturing faltered in the short term, overall manufacturing output in Canada expanded by 1.3% between 2003 and 2006. The construction and services sectors have also exhibited growth.

The arrival of China has simultaneously lowered the prices of consumer goods and raised resource prices. This combination of price changes initiated by China accelerated a widespread restructuring of the Canadian economy. Strong demand from resource industries has led to higher employment and wage growth.

The increased incomes in the resource industries have fed demand for goods and services, supporting growth in areas such as construction and finance and real estate.

At the same time that manufacturing has shed jobs, its overall output remained steady, supported by advances in the production of machinery and equipment, computers and electronics, as well as primary and fabricated metals. Many of the cuts in manufacturing reflected structural changes in areas such as clothing, autos and forestry products that originated for reasons other than the rising exchange rate.

Not only are wages and incomes on the rise but the appreciating Canadian dollar, rising commodity prices and falling manufacturing prices have meant that Canadians’ purchasing power has increased. As Canada’s terms of trade improved, with imported goods becoming relatively less expensive even as resource prices rose, Canada has been able to turn its resource exports into more imported manufactured products.

The integration of emerging countries into the global economy is symbolized by the surge in China’s growth, which coincided with the boom in resource prices after 2002. The resource boom in Canada resulted in higher wages, attracting individuals, primarily from the Atlantic Provinces, to the West, notably Alberta. Inter-provincial net migration to Alberta averaged 24,000 per year from 2003 to 2006. In 2006 alone, Alberta received 57,000 migrants from other provinces, the largest movement of people to a province on record back to 1972.

The research paper “Not Dutch Disease, it’s China syndrome” is now available as part of the Insights on the Canadian Economy Paper Series (11-624-MIE2007017, free) from the Publications module of the Statistics Canada website, www.statcan.ca.

This article can also be found in the August 2007 Internet edition of Canadian Economic Observer, Vol. 20, no. 8 (11-010-XWB, free), also available online.