Monday, June 4, 2012

Is Canada suffering from 'Dutch disease'?

To those unfamiliar with the economic concept, all the recent talk among Canada's political class about "Dutch disease" may have left you wondering what nasty ailment had befallen the poor people of the Netherlands.

The term has gained new attention courtesy of NDP Opposition Leader Tom Mulcair, who insists the phenomenon applies to Canada. Mulcair claims that "Dutch disease" has hit the country, blaming energy exports from the Alberta oilsands for artificially raising the Canadian dollar and hollowing out the manufacturing industry.

Coined in an article in The Economist in 1977, the concept refers to the adverse economic effects that the discovery of large natural gas fields off of the coast of the Netherlands in the 1960s had on the country's manufacturing sector.

The theory goes that a boom in a natural resource sector can lead to an appreciation of a country's real exchange rate. That increase in the dollar value makes exports more expensive, and has an adverse effect on the manufacturing sector by making it less competitive. Read More