The energy boom that marked the beginning the new millennium in global markets has brought about a series of considerable shifts in economic policies of the countries with abundant natural resources, subjecting some of them to so-called Dutch Disease – the phenomenon, which occurs when strengthening of the currency, caused by a thriving energy sector, has a deteriorative impact on manufacturing and other exports (Ciuriak, 2013). Canada, among other major energy producers, has now become the center of global attention, because its oil deposits – Alberta’s tar sands – now rank next to those of Saudi Arabia (Bergevin, 2006). Thus, manufacturers have been put under significant pressure triggered by a whole number of factors, including competition in the world market and a negative impact of energy prices on the value of the Canadian dollar (Issa, Lafrance, & Murray, 2008).
However, this paper is aimed to prove that despite certain economic difficulties Canada has to face at present, the building of tar sands pipelines and the increase of energy exports, though making the economy suffer from a peculiar case of Dutch Disease, can be rather beneficial for the country, provided that a number of strategies are adopted to immunize the economic system against its overdependence on natural resources.
It was not until the last decade that the Canadian economy has changed its traditional direction, having shifted the focus from the production of various commodities to the extraction and export of the country’s abundant natural resources. Despite the fact, that it was not an unprecedented case in the Canadian economic history, it is worth noticing that never before was the government so willing to accept the status of a global energy supplier. On the contrary, the industrial sector was mainly preoccupied with the idea of overcoming this stereotype. However, the government realized, how much the economy of the country has benefited financially from the increasing energy prices in recent years, and made a decision to concentrate on the export of unprocessed materials, such as gas and oil (Bayoumi & Mühleisen, 2006).
Thus, the future of Canada as an energy producer and exporter now largely depends on its large unconventional deposits of oil. Although Alberta’s tar sands offer a high potential for further expansion of exports, which, in its turn, ensures extensive economic development, there are still certain indicators that give grounds for concerns.
First and foremost, oil and gas extraction led to a sharp decline in production and growth of unemployment rate. This consequence is accounted by the fact that labor demand in the energy sector has risen dramatically, which triggered the migration flow from other economic sectors, which has increased the demand for services and their price (Shakeri, Gray, & Leonard, 2012). Secondly, the equilibrium between the American and the Canadian currency has been lost, because the resource export has strengthened the Canadian dollar, causing a 60-percent rise in value. Moreover, the boom in the energy sector has upset the overall trade balance. Other export goods are neglected, which leads to the considerable loss of productivity (Stanford, 2012). All these factors give reasons for a supposition that Canadian tar sands pipelines have become a source of notorious Dutch disease.
This term first appeared in the early 1970s to define the period of the Netherlands’ history, immediately after a rich gas deposit was found in the North Sea. The discovery, which had been initially considered as a boon for the economy, turned out to be its curse, as the unprecedented growth of gas exports led to the rapid downfall in all non-energy sectors of the economy (Bergevin, 2006).
This peculiar phenomenon is rather vague and hard to understand, but still there exist three possible explanations why the rise in the number of natural resources can exert deteriorative influence on the economy in general (Bergevin, 2006).
First, when a new deposit is discovered, natural resources that are stored in it cannot be used until they are extracted. This process requires labor and funding. While people and finances are involved in extraction, they become unavailable for other sectors. Thus, the resource sector inevitably paralyzes the rest of the country’s economy (Shakeri, Gray, & Leonard, 2012).
Second, the discovery of a significant amount of oil or gas always brings investments from abroad, creating an uncontrolled flow of money into the country. Thus, the domestic currency is made to grow artificially, which results in higher prices for other exports making them non-competitive in foreign markets (Issa, Lafrance, & Murray, 2008).
Third, the production of natural resources is considered to be a thing in itself, as it does not give any positive externalities to other industries. On the contrary, if the economy of the country is mostly concerned with manufacturing, it ensures a parallel development of new technologies, or new approaches to operating procedures (Bergevin, 2006).
All these symptoms of Dutch Disease become obvious when the country runs out of a newly discovered resource or it becomes so cheap that its price no longer covers the cost of extraction. In this case, the country has to face the consequences of a long-term neglect of other industries, which can be irretrievable by this moment.
It is undeniable that Canada is now suffering from Dutch Disease, though the case is rather mild. Here are the symptoms:
- since the discovery of tar sands the export of raw materials has risen dramatically and now accounts for two-thirds of the total export of the country;
- a lot of money is spent on pipelines and new technologies that are meant to increase the amount of extracted resources;
- the productivity of businesses has declined in comparison with that of the USA;
- the country has ceased to fund innovation technologies that are not connected with oil extraction;
- the lack of scientific research in the sphere of innovation account for the failure to build companies of international importance;
- emissions that come from tar sands production have deplorable consequences for the environment (Shakeri, Gray, & Leonard, 2012).
Although all the enumerated factors cannot be left unattended, their gravity is exaggerated. The Canadian economy is still rather stable: the rate of inflation is not high, and GDP is increasing (Shakeri, Gray, & Leonard, 2012).
Canadian tar sands provide a great potential for the economy but are difficult to extract. The government is now facing the challenge to overcome the existing constraints, such as lack of skilled labor, lack of resources to maintain pipeline capacity, growing demand for water and natural gas that are necessary for oil sands operations, and excessive greenhouse emissions (Bayoumi & Mühleisen, 2006).
Provided that these problems have been solved, the natural resource sector can continue functioning without any significant interference on behalf of the government, which will give policy-makers an opportunity to consider a number of pressing issues in other branches of the economy.
It is now crucial for Canada to implement a series of economic strategies that will help avoid repetition of the Dutch experience.
First of all, wage increases ought to be limited because they lead to the loss of competitiveness and create pressure on prices and salaries in service and manufacturing sectors. It would be reasonable for the government to ensure that wages increase proportionally with the productivity growth.
Second, it is highly important to avoid excessive spending on oil extraction to the detriment of other businesses. Perhaps, the best solution here would be to create a fund for Alberta’s tar sands and all the expenditures required for their sustainability.
Third, the Canadian dollar exchange rate must be reduced to its real value. Artificial overvaluation had a detrimental effect on all non-energy exports (Issa, Lafrance, & Murray, 2008). The country should concentrate on establishing a stable exchange rate system with its trade partners.
It would also be desirable for the government to accept the current shift to a service economy. Job losses in manufacturing do not always mean that the sector is losing its significance. In this case, it is just a part of the restructuring process, which is aimed at the formation of the service-oriented economic system.
Thus, it is evident that, despite the problems associated with tar sands, which can be referred to as Dutch Disease, the implementation of efficient economic policies can mitigate the consequences and make the natural resource sector beneficial for the economy of the country in the long run.
References
Bayoumi, M. T., & Mühleisen, M. M. (2006). Energy, the exchange rate, and the economy: macroeconomic benefits of Canada’s oil sands production (No. 6-70). International Monetary Fund.
Bergevin, P. (2006). Energy Resources: Boon or Curse for the Canadian Economy?. Parliamentary Information and Research Service.
Ciuriak, D. (2013). Canada’s Manufacturing Malaise: a Comment. Available at SSRN 2285173.
Issa, R., Lafrance, R., & Murray, J. (2008). The turning black tide: energy prices and the Canadian dollar. Canadian Journal of Economics/Revue canadienne d’économique, 41(3), 737-759.
Shakeri, M., Gray, R. S., & Leonard, J. (2012). Dutch Disease or Failure to Compete? A Diagnosis of Canada’s Manufacturing Woes. IRPP Study, (30), 1-16.
Stanford, J. (2012). A cure for dutch disease: Active sector strategies for Canada’s economy. Ottawa, ON: Canadian Centre for Policy Alternatives.