June 28, 2012 - In an new op-ed, MLI's Brian Lee Crowley and Jason Clemens breakdown the Dutch disease argument and say that explanation for what ails Ontario's manufacturing sector is much more complicated than you think. The op-ed is based on the Commentary, Inconvenient Truths: What US and Asian Manufacturing Tell us About Canadian Manufacturing and the Dollar. The full op-e d is below:

 

What U.S. and Asian manufacturing tell us about Canada's manufacturing woes

By Brian Lee Crowley and Jason Clemens, Troy Media, June 28, 2012

Does Canada suffer from Dutch Disease? Those who think so point to the fact that the loonie rose while the number of jobs in manufacturing was falling. Superficially, that bolsters the case of those who think Canada's problem is that demand for our natural resources is driving up the dollar and sideswiping manufacturing in the process.

Inconveniently for those who blithely proffer the Dutch Disease diagnosis, manufacturing declined in a very similar way in U.S. states, such as Michigan and Ohio, places with similar manufacturing sectors, but no rising dollar to contend with. And manufacturing has been shifting to Asia for decades, independently of the loonie's movements.

Begin by looking at manufacturing in Ontario and its relationship to the loonie; over the past quarter century manufacturing employment in Ontario tended to increase when the loonie was weak compared to the greenback and vice-versa.

For example, from 1991 to 2002, our dollar declined against the U.S. dollar by over a quarter while manufacturing employment in Ontario increased by over a fifth.

It works in reverse too: from 2002 through to 2008 the Canadian currency rose by almost half against the U.S. dollar; manufacturing employment fell by almost a fifth.

The story becomes less clear, however, post-recession. Manufacturing employment in Ontario fell by 105,600 in 2009 while the currency fell by 7 per cent. Even more telling: manufacturing jobs increased by 4,400 between 2009 and 2011 while the currency rose 15 per cent.

How about the exchange rate and manufacturing value-added (MVA) in Ontario? Between 1991 and 2002 the Canadian dollar fell by more than a quarter against the U.S. dollar, while Ontario's MVA nearly doubled. Conversely, between 2002 and 2008 the value of the Canadian dollar rose by nearly one half while MVA fell by one quarter ($31 billion). So far, so Dutch.

But wait. Manufacturing in Ontario, particularly in autos, is deeply integrated with operations in the United States. There is, therefore, a straightforward test of the currency explanation of changes in manufacturing. Specifically, border states that have integrated manufacturing sectors similar to Ontario, such as Michigan, Ohio, and Indiana, should not have experienced declines in manufacturing like Ontario if the principal explanation for the decline in Ontario is the change in the value of the currency. If similar declines are observed in these U.S. states, then something else is likely happening, something that goes far beyond mere changes in the value of the dollar.

Behold: All three U.S. states begin to experience a decline in manufacturing employment starting in 2000 through to 2009. Manufacturing jobs fell by somewhere between a third and a half in Michigan, Ohio, and Indiana over this period. Ontario's decline began five years later, in 2005, and fell by over a quarter between 2004 and 2009. In other words, Ontario's decline in manufacturing employment was actually less than that experienced in America's rustbelt.

Starting in 2009, all four jurisdictions appear to have turned the corner in terms of manufacturing jobs growth. Employment rose by 1 per cent in Ontario and Ohio, by 5 per cent in Indiana, and by 9 per cent in Michigan between 2009 and 2011.

Critically, similar trends in manufacturing employment are observed in both Ontario and its peer jurisdictions, none of which experienced the appreciation of the currency which has affected Ontario. We need to look elsewhere than changes in the value of the loonie, then, to explain changes in Ontario's manufacturing job numbers.

An obvious place to look is where manufacturing is growing handsomely: Asia.

Pick a few representative Asian countries, such as China, South Korea, Thailand, and Indonesia. Every one of them has seen impressive increases in the value added by their manufacturers over the last two decades. For example, Chinese manufacturing value-added (MVA) increased 15 times to US$1.8 trillion between 1990 and 2010. Indonesia, South Korea, and Thailand also experienced robust growth in MVA, rising to seven times, four times and five times their 1990 level respectively over the two decades. Indeed, the combined MVA in these four countries was US$228 billion in 1990. It more than doubled by 2000, and then almost quadrupled by 2010.

If Dutch disease is our ailment, how is it that rustbelt states like Michigan, Ohio, and Indiana experienced changes similar to Ontario, without a change in their underlying currency? And how is it that Ontario's sector tracks improvements in those jurisdictions post-recession, despite the continuing strength of our dollar?

There is a global restructuring underway in manufacturing, one that requires Canadians manufacturers to become much more productive if they are to compete. The changes in Ontario's manufacturing sector are part of a much larger set of changes affecting the global manufacturing sector, and those changes will continue to shape manufacturing globally no matter what the loonie does.

Brian Lee Crowley and Jason Clemens are co-authors of, Inconvenient Truths: What US and Asian Manufacturing Tell us About Canadian Manufacturing and the Dollar, which was recently released by the Macdonald-Laurier Institute. www.macdonaldlaurier.ca.