Mark Carney doesn’t think Canada has any control over the resource boom.
The 47-year-old governor of the Bank of Canada, sitting beneath the portraits of his predecessors in the bank’s stately Graham Towers boardroom, says that as China and other emerging economies have fuelled a sustained rush for resources, sometimes called a commodities supercycle, they have redrawn the fortunes of developed countries like Canada.
The supercycle has spurred a massive expansion of the country’s biggest commodity export in the Albertan oilsands, triggered the deregulation of federal environmental assessments, made mining projects in the country’s northern regions viable and – at least according to the official opposition – contributed to the decline of the manufacturing sector.
As politicians have wrestled with this historic new force in the Canadian economy, misunderstandings about its root causes have developed and, left unchallenged, these could prompt bad policy choices.
“If you draw the wrong conclusions from it, you could do a lot of damage,” said Carney.
That possibility has forced Carney – under the bank’s mandate to study and explain risk to Canada’s well being – to weigh in on what he and his team of experts believe is really going on.
Dutch Disease
As the spring parliamentary session drew to a close, NDP leader Thomas Mulcair brought the partisan divide over resources to a fever pitch when he claimed Canada suffers from Dutch Disease.
Mulcair’s endorsement of the economic theory, which holds that increased commodity exports bring about a higher currency and make it harder for manufacturers to export, drew jeers from the government benches, who said the Quebec politician was calling the West’s most lucrative business an illness.
The theory is politically expedient because it assumes a simply zero-sum relationship between the resource sector and manufacturers that anyone can understand – we either build factories or dig mines.
With some of the best minds and tools at his disposal, Carney and the bank dug in and sought out the deeper complexity behind the rise of the resource sector.
“We didn’t just sit there and draw a line,” Carney said. “We used a major macro model of which there is no analog in this country and virtually no analog in the world which ran those simulations.”
The result was an analysis presented in the “Dutch Disease” speech, which Carney delivered at an annual meeting of global business people at the Spruce Meadows equestrian club southwest of Calgary on September 7.
“Unambiguously good”
The speech makes mincemeat out of the Dutch Disease caricature, though it arguably paints a more dire situation than the one expounded by Mulcair.
It takes its cue primarily from the global economic outlook – a stagnant U.S., a fumbling Europe and the emerging economies that are leading growth.
Drawing from an analysis of where these economies are headed, Carney ties the resource boom to the global restructuring that the emerging economies are creating in order to fulfill their material needs.
By and large, appreciating this seismic shift is where the debate over the resource boom should begin, in Carney’s view. (It will be dealt with in more detail in tomorrow’s follow-up story.)
But the speech also takes into account the mechanics of the resource boom within Canada: the impact on incomes, changes in government tax revenue and new opportunities brought on by higher energy prices.
The net judgment Carney delivered to the Calgary crowd was that high commodity prices were “unambiguously good” for a country with lots of commodities.
“The simply starting point, that is based on a lot of analysis, is that higher commodity prices are good overall for the Canadian economy,” says Carney in the interview at the bank a week later.
“So ‘unambiguously good’ – that is not a slogan,” said Carney. “It’s not something we want to be true.”
Canada’s middle of the pack position
A major misconception surrounding Canada’s susceptibility to Dutch Disease is that we’ve veered sharply into becoming a resource dependent economy.
The relatively recent imprimatur of the oilsands onto the Canadian identity, and perhaps a deep-seated fear over economic and political power shifting West, lends easily to the belief that the economy has suddenly been overpowered by the resource sector.
The governing Conservative’s vocal backing of the oil, gas and mining industries adds to the pastiche of a once progressive, labour-friendly manufacturing country that has given way to a new era of resource extraction, pick-up trucks and oil rigs.
But Canada on the whole remains a much more balanced economy compared with other countries around the world.
Whether you take commodity exports as a share of GDP, commodity exports as a share of total exports, or government dependency on resource revenues, Canada is in the middle of the pack.
Carney meets regularly with the governors of the banks of Australia, Chile, Norway, Russia, Saudi Arabia and other countries that have a much more severe dependency on commodity exports.
At the meetings, which Carney attends in his role on the board of the Bank of International Settlements, they often discuss the volatility of commodity prices on their economies, he says.
“It does create challenges and it does for them tip the balance toward having resource funds or intergenerational funds or sovereign wealth funds, depending on the term you want to use, that helps to smooth and spread over time windfall revenues,” he said. “Norway is probably the classic example of that but Russia has a fairly sophisticated tiering of funds as does Chile.”
Hewers of wood and drawers of water?
Another thing Canadians might resist about the resource sector is the assumption that it is a less dynamic and innovative industry, and that it creates a kind of complacency in the economy that keeps entrepreneurs from creating a high-tech, mature business environment.
In other words, it’s that old pejorative adage that Canadians are mere hewers of wood and drawers of water.
But Carney flips this view on its head.
“In terms of the resource sector writ large, one of the things we lament in generally in Canada, rightfully so in many cases, is that the venture capital industry is relatively a poor performer,” Carney said. “And then one points to a lack of entrepreneurial spirit.”
But “if you look at the resource sector in Canada, the ecosystem there is very entrepreneurial, very venture capital, (a) very high-risk sector that invests around the world.”
From his vantage point, Carney doesn’t sea change in identity that both the government and opposition play up for different reasons.
“We should not accept and I don’t think Canadians do accept (…) that we’re going to be a commodity economy,” Carney said.
“The people in that area (around resources) are going to develop it and we should make sure we maximize the benefits of it across the country.”
Original Article
Source: ipolitics
Author: James Munson
The 47-year-old governor of the Bank of Canada, sitting beneath the portraits of his predecessors in the bank’s stately Graham Towers boardroom, says that as China and other emerging economies have fuelled a sustained rush for resources, sometimes called a commodities supercycle, they have redrawn the fortunes of developed countries like Canada.
The supercycle has spurred a massive expansion of the country’s biggest commodity export in the Albertan oilsands, triggered the deregulation of federal environmental assessments, made mining projects in the country’s northern regions viable and – at least according to the official opposition – contributed to the decline of the manufacturing sector.
As politicians have wrestled with this historic new force in the Canadian economy, misunderstandings about its root causes have developed and, left unchallenged, these could prompt bad policy choices.
“If you draw the wrong conclusions from it, you could do a lot of damage,” said Carney.
That possibility has forced Carney – under the bank’s mandate to study and explain risk to Canada’s well being – to weigh in on what he and his team of experts believe is really going on.
Dutch Disease
As the spring parliamentary session drew to a close, NDP leader Thomas Mulcair brought the partisan divide over resources to a fever pitch when he claimed Canada suffers from Dutch Disease.
Mulcair’s endorsement of the economic theory, which holds that increased commodity exports bring about a higher currency and make it harder for manufacturers to export, drew jeers from the government benches, who said the Quebec politician was calling the West’s most lucrative business an illness.
The theory is politically expedient because it assumes a simply zero-sum relationship between the resource sector and manufacturers that anyone can understand – we either build factories or dig mines.
With some of the best minds and tools at his disposal, Carney and the bank dug in and sought out the deeper complexity behind the rise of the resource sector.
“We didn’t just sit there and draw a line,” Carney said. “We used a major macro model of which there is no analog in this country and virtually no analog in the world which ran those simulations.”
The result was an analysis presented in the “Dutch Disease” speech, which Carney delivered at an annual meeting of global business people at the Spruce Meadows equestrian club southwest of Calgary on September 7.
“Unambiguously good”
The speech makes mincemeat out of the Dutch Disease caricature, though it arguably paints a more dire situation than the one expounded by Mulcair.
It takes its cue primarily from the global economic outlook – a stagnant U.S., a fumbling Europe and the emerging economies that are leading growth.
Drawing from an analysis of where these economies are headed, Carney ties the resource boom to the global restructuring that the emerging economies are creating in order to fulfill their material needs.
By and large, appreciating this seismic shift is where the debate over the resource boom should begin, in Carney’s view. (It will be dealt with in more detail in tomorrow’s follow-up story.)
But the speech also takes into account the mechanics of the resource boom within Canada: the impact on incomes, changes in government tax revenue and new opportunities brought on by higher energy prices.
The net judgment Carney delivered to the Calgary crowd was that high commodity prices were “unambiguously good” for a country with lots of commodities.
“The simply starting point, that is based on a lot of analysis, is that higher commodity prices are good overall for the Canadian economy,” says Carney in the interview at the bank a week later.
“So ‘unambiguously good’ – that is not a slogan,” said Carney. “It’s not something we want to be true.”
Canada’s middle of the pack position
A major misconception surrounding Canada’s susceptibility to Dutch Disease is that we’ve veered sharply into becoming a resource dependent economy.
The relatively recent imprimatur of the oilsands onto the Canadian identity, and perhaps a deep-seated fear over economic and political power shifting West, lends easily to the belief that the economy has suddenly been overpowered by the resource sector.
The governing Conservative’s vocal backing of the oil, gas and mining industries adds to the pastiche of a once progressive, labour-friendly manufacturing country that has given way to a new era of resource extraction, pick-up trucks and oil rigs.
But Canada on the whole remains a much more balanced economy compared with other countries around the world.
Whether you take commodity exports as a share of GDP, commodity exports as a share of total exports, or government dependency on resource revenues, Canada is in the middle of the pack.
Carney meets regularly with the governors of the banks of Australia, Chile, Norway, Russia, Saudi Arabia and other countries that have a much more severe dependency on commodity exports.
At the meetings, which Carney attends in his role on the board of the Bank of International Settlements, they often discuss the volatility of commodity prices on their economies, he says.
“It does create challenges and it does for them tip the balance toward having resource funds or intergenerational funds or sovereign wealth funds, depending on the term you want to use, that helps to smooth and spread over time windfall revenues,” he said. “Norway is probably the classic example of that but Russia has a fairly sophisticated tiering of funds as does Chile.”
Hewers of wood and drawers of water?
Another thing Canadians might resist about the resource sector is the assumption that it is a less dynamic and innovative industry, and that it creates a kind of complacency in the economy that keeps entrepreneurs from creating a high-tech, mature business environment.
In other words, it’s that old pejorative adage that Canadians are mere hewers of wood and drawers of water.
But Carney flips this view on its head.
“In terms of the resource sector writ large, one of the things we lament in generally in Canada, rightfully so in many cases, is that the venture capital industry is relatively a poor performer,” Carney said. “And then one points to a lack of entrepreneurial spirit.”
But “if you look at the resource sector in Canada, the ecosystem there is very entrepreneurial, very venture capital, (a) very high-risk sector that invests around the world.”
From his vantage point, Carney doesn’t sea change in identity that both the government and opposition play up for different reasons.
“We should not accept and I don’t think Canadians do accept (…) that we’re going to be a commodity economy,” Carney said.
“The people in that area (around resources) are going to develop it and we should make sure we maximize the benefits of it across the country.”
Original Article
Source: ipolitics
Author: James Munson
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