It’s time we talked about what is known in economic circles as the Dutch Disease


John Rafferty MPTHUNDER BAY – Leaders Ledger – New Democrats have never been shy about taking on difficult issues. It would often be easier to deny that there was a problem and just carry on as is it didn’t exist, but we don’t. Thus, given recent economic developments in our riding, region, and country though I think it’s time we talked about what is known in economic circles as the ‘Dutch Disease’ and how it is affecting our standard of living.

Technically speaking, Dutch Disease is an economic term used to describe a reduction in a country’s export performance of manufactured goods as a result of an appreciation of the exchange rate following the discovery and exploitation of natural resource deposits (ie: natural gas, gold, oil, etc.). Put differently, Dutch Disease is a description of a series of related economic events that begins with the rise of a natural resource sector, continues with a rise in the value of a currency, and ends with the significant destabilization or decline of the manufacturing sector in a particular economy.

The term ‘Dutch Disease’ was first used in an article in The Economist magazine in 1977 which chronicled the discovery and exploitation of natural gas in the Netherlands in 1959. The discovery of that valuable resource subsequently lead to a rapid appreciation in the value of the Dutch Gilder versus the U.S. Dollar and caused the near extinction of the manufacturing sector which could no longer sell its products abroad because the strong currency served as a competitive disadvantage to exporters. Since the publication of that article, Dutch Disease has become a universally accepted economic term and has been used to describe a number of similar situations in economies around the world including; the discovery and export of gold and other resources from the America’s to Spain in the 1600’s, the Australian gold rush of the 19th century, and a dairy products boom in New Zealand in the 2000’s.

So the question being asked today by Tom Mulcair and Canada’s New Democrats is; ‘Does the Canadian economy presently suffer from what is known as Dutch Disease?’ We believe that it does, and our position is strongly supported by a number of prominent economists from across the political spectrum who have studied this question recently.

Where the Netherlands had a natural gas boom, Canada has had an ongoing oil boom thanks to the huge deposits found in the oil sands of Alberta. Where the Dutch Gilder increased in value in the 1960’s against the U.S. Dollar, the Canadian Dollar has increased dramatically through the 1990’s – 2000’s (from just 63.11 cents U.S. in 1998 to as much as $1.10 U.S. in 2007). Where Dutch manufacturing was nearly destroyed in the 1950’s -1960’s, Canada has lost more than 500,000 manufacturing jobs, and that sector’s share of the economy as a percentage of GDP has shrunk from around 24% in the 1960’s to just 13% in 2010 (including a full two percent decline since 2007). These similar economic circumstances alone, while compelling, do not provide us with conclusive evidence of Dutch Disease in Canada, however, the theory is supported by the empirical and quantitative findings of several economists who have studied the question very thoroughly and very recently.

In fact, three major studies over the last three years have found that Canada’s economy is suffering from Dutch Disease. The three studies, carried out by the ‘left’ leaning Canadian Centre for Policy Alternatives (CCPA), the ‘centre-right’ leaning Institute for Research in Public Policy (IRPP), and the Harper Conservative government’s own Ministry of Industry all came to very similar conclusions. The IRPP report found that about 25 percent of the decline in the manufacturing sector can be attributed to the high dollar and concludes that we have a “mild” case of Dutch Disease, which was also in line with the findings of the CCPA. And what does the Harper Government’s own research indicate? After more than a year of work and at a cost of $250,000 to taxpayers the report concludes that; “…between 33 and 39 per cent of the manufacturing employment loss that was due to exchange rate developments between 2002 and 2007 is related to the Dutch disease phenomenon.”

In short, Dutch Disease is a real economic phenomenon and it is afflicting the Canadian economy. Saying that, we must acknowledge that Dutch Disease is a natural phenomenon but one that afflicts an economy instead of a living body. Its occurrence is no one’s fault, but as with any untreated disease the symptoms can become worse if the illness is not properly treated when it is first diagnosed. Over time, and while the Conservatives and Liberals continue to deny this increasingly obvious economic reality, Tom Mulcair and Canada’s New Democrats will be offering our prescription for helping our manufacturing sector overcome this case of the Dutch Disease and for returning our economy to a more balanced and healthy state.

John Rafferty MP
Thunder Bay Rainy River

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John Rafferty is the current Member of Parliament for Thunder Bay – Rainy River and a member of the New Democratic Party caucus in the House of Commons in Ottawa, Ontario. John was first elected to serve as MP in the 2008 federal election and was subsequently re-elected on May 2, 2011 with 48.1% of the vote.