Relying on a weak currency limits Canadian investment, productivity, says new study
Ottawa, ON -- The current strong value of the Canadian dollar has raised concerns about its potential negative effe...
Ottawa, ON — The current strong value of the Canadian dollar has raised concerns about its potential negative effect on exports and competitiveness. A recent study casts doubt on this thinking by documenting the risks of a weak currency on a country’s economy.
A currency depreciation reduces investment in physical capital — such as machinery and equipment — which can limit Canada’s productivity and economic growth, according to a new report by The Conference Board of Canada in conjunction with the Social Sciences and Humanities Research Council (SSHRC).
“These findings should sound a warning bell for policy-makers concerned about Canadian competitiveness. Investment in physical capital is an important driver of productivity growth, and lagging labour productivity explains much of the Canada-U.S. income gap,” said Constance Smith, co-author of the study and a professor at the University of Alberta. “Policies that weaken the exchange rate have important — perhaps unintended — consequences for industry investment, productivity and economic growth.”
The study, The Exchange Rate and Wages: How They Affect Capital Investment, examined 17 developed Organisation for Economic Cooperation and Development (OECD) countries, including Canada. The research found that the effect of the exchange rate on investment levels is significant in the short term and often persists for years, particularly in services sectors of an economy.
In addition, the study demonstrated that increases in real wages, without corresponding gains in labour productivity, reduce investment in the medium and long term. Thus, inflexible labour markets — created by interprovincial mobility barriers or policies such as mandatory retirement — may hinder investment, which could negatively affect future productivity gains and economic growth.
This study is an outcome of a unique partnership between The Conference Board of Canada and SSHRC, linking the Board’s Canada Project with SSHRC’s Initiative on the New Economy. In all, five academic research papers will be published under this partnership. The report is publicly available from the Conference Board’s e-library at www.e-library.ca.