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Resource Royalties: A Cure for Dutch Disease

May 11, 2012

2-minute read

I have the following op-ed in today’s Saskatoon StarPhoenix:

Royalty hike cure for Dutch disease

Premier Brad Wall calls federal NDP Leader Tom Mulcair “very, very divisive” for expressing concern that Canada's overvalued petro-dollar is eliminating manufacturing jobs.

In reality, Wall is being divisive by exploiting this legitimate concern to fan the flames of western alienation. Saskatchewan and other provinces would benefit by collecting more revenue from non-renewable resources, as suggested by Mulcair.

Wall and others are correct that the exchange rate is not the only factor reducing manufacturing employment. However, as noted by The SP’s May 9 editorial and Les MacPherson’s May 10 column, economic analyses from universities, banks and international organizations indicate that “Dutch disease” caused much of the particularly sharp decline in Canadian manufacturing employment over the past decade.

Much like the Netherlands in the 1960s, Canada’s currency has surged due to a fossil fuel boom. Between 2002 and 2011, the loonie’s average exchange rate skyrocketed to 101 American cents from 64 cents.

But while Canadian-based exporters are consequently receiving much less for their output, they are paying the same amount for their inputs. The Organization for Economic Co-operation and Development calculates that, in both 2002 and 2011, the loonie’s purchasing power in Canada (including imported products) equalled 81 American cents in the U.S.

Saskatchewan has itself suffered from this Dutch disease. Statistics Canada reports that, since Wall took office in November 2007, manufacturing employment has declined by 14 per cent in this province, compared to 12 per cent nationally.

Specifically, Saskatchewan lost 4,600 manufacturing jobs, including the closure of sawmills and pulp mills harmed by the overvalued exchange rate. Other provinces lost a further 231,300 manufacturing jobs during the same period.

MacPherson is correct that judicious saving and investment of resource income could alleviate upward pressure on our currency. However, provincial governments must collect the income before they can save or invest it.

The Saskatchewan Ministry of Energy and Resources’ most recent annual report indicates that it collected only $2.2 billion of revenue from $17.6 billion of non-renewable resource sales in 2010. Such low royalties allow private companies to reap super-profits by extracting publicly-owned resources.

The Canadian Association of Petroleum Producers’ most recent Statistical Handbook indicates that the industry sold $11.1 billion of Saskatchewan oil and gas in 2010, but paid only $1.8 billion in royalties and spent a further $6.5 billion on exploration, development and operations.

In other words, oil and gas companies made enough in Saskatchewan to immediately pay off all of their investments, with $2.8 billion of extra profit left over.

Foreign investors eager to get in on the action have been buying loonies in order to take over, or acquire shares of, Canadian resource companies. This inflow of foreign funds drives up the exchange rate, to the detriment of manufacturing and other Canadian-based export industries.

Ironically, since resources are priced in American dollars, the higher exchange rate further reduces provincial resource revenues in Canadian dollars. Saskatchewan’s recent budget estimates that each U.S. cent of appreciation in the loonie reduces non-renewable resource revenue by $34 million.

The solution is to increase royalty rates, which would moderate the flow of foreign funds into our resource industries and collect the public revenue needed for the provincial savings funds that MacPherson advocates.

Of course, if Saskatchewan did so alone, it would have relatively little impact on the national exchange rate. That is why Mulcair’s comments were directed at the unbalanced development of Alberta’s oilsands - a larger-scale giveaway of public resources.

But Wall is defensive because he has mimicked and even undercut Alberta by guaranteeing ultra-low royalties to the private corporations that extract Saskatchewan’s non-renewable resources. This policy would be short-sighted even if it had no effect on the exchange rate. Dutch disease, including a proportionally larger loss of manufacturing jobs in Saskatchewan than in the rest of Canada, is just another negative consequence.

Mulcair has articulated a balanced approach to resource development that would generate more public revenue, a more competitive exchange rate, and more manufacturing jobs. Saskatchewan is well positioned to help implement and benefit from this approach by raising provincial resource royalties.

Erin Weir is an economist with the United Steelworkers union, which represents workers in Saskatchewan's mining and manufacturing industries.

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