Northern Economist on Manufacturing Decline in the Financial Post

FP Comment 

Everybody’s Dutch

Special to Financial Post  May 29, 2012 – 7:51 PM ET

Developed nations in general have seen manufacturing declines
By Livio Di Matteo

The Great Canadian Angst over the decline of manufacturing must be tempered with evidence on two fronts. First, the decline as represented by Canada’s share of GDP in manufacturing has been in progress since the end of the Second World War. Second, when examined in an international context, Canada’s performance is not that different from the advanced economies that we usually compare ourselves with.

Manufacturing’s share of Canadian GDP rose from 20% in 1926 to a peak of nearly 30% during the Second World War. From an average of 26% during the 1940s, the manufacturing-to-GDP ratio dropped to 23% by the 1960s and reached 17% during the 1980s. The period from 1980 to 2000 saw a stabilization of that ratio at about 17%, with the decline resuming in the first decade of the 21st century. Between 2000 and 2010, the ratio averaged 14%.

Despite the long-term decline in the manufacturing-to-GDP ratio, the stabilization of the ratio between 1980 and 2000 has become the new “benchmark.” This stabilization occurred during a period of substantial currency depreciation against the U.S. dollar. From the end of the Second World War to the early 1970s, the value of the Canadian dollar relative to the U.S. dollar was close to par. The period from the 1970s to 2000 saw depreciation, but since 2000 the currency has appreciated and is back where it was for much of the 1945-75 period. The recent plunge in the manufacturing-to-GDP ratio is associated with this appreciation and the Western resource boom, but this “Dutch disease” relationship is at best a short-term correlation.

Manufacturing as a share of GDP in Canada has been in decline since the end of the Second World War from a peak generated by wartime-driven industry. Until the Second World War, the manufacturing-to-GDP ratio had ranged from 20% to 25% since the 1870s. Relative to the period from 1980 to 2000, the current manufacturing decline is understandably a cause for concern. However, viewed over a longer time span, it is a process much like agriculture’s decline as a share of employment and output as we moved from the 19th to the 20th century.

That this decline is part of a long-term process of economic change and development is evident with comparisons to other economies. The accompanying figure uses data from the United Nations for the period 1970 to 2010 to calculate the manufacturing-to-GDP ratios for Canada, the other six G7 countries as well as Brazil, China, India, Australia and the Netherlands, whose experience with North Sea oil in the 1970s led to the coining of the term “Dutch disease.”

Japan and Germany have traditionally had the highest G7 manufacturing-to-GDP shares, but nevertheless declined from 35% and 31% respectively in 1970 to 20% and 19% by 2010. Over the same period, Italy went from 25% to 15%, the United States from 24% to 13%, Great Britain from 29% to 10%, France from 22% to 10% and Canada from 19% to 11%. In 1970, Canada already had the lowest manufacturing-to-GDP ratio of the G7 countries. Manufacturing in Australia and the Netherlands had comparable performances to the G7.

As for advanced developing countries, Brazil paralleled the performance of the G7, going from a manufacturing-to-GDP ratio of 25% in 1970 to 13% by 2010. China and India, on the other hand, have maintained their manufacturing sectors relative to their GDP. However, India’s manufacturing-to-GDP share performance is exceptional at only 13% in 1970 and again in 2010. China is also an exceptional performer with a high manufacturing-to-GDP ratio of 37% in 1970 and a small decline to 33% by 2010.

The decline of Canada’s manufacturing sector parallels Australia, which can be viewed as a resource-exporting country, but it also parallels France, Great Britain and Italy, which are not viewed as natural resource-driven economies. Generally speaking, all developed economies have seen declines in their manufacturing sector’s share of GDP over time. A high manufacturing-to-GDP ratio is often more representative of an earlier stage of economic development — the transition from agricultural to industrial development. These changes are really better viewed as an economic evolution.

Financial Post

Livio Di Matteo is professor of ­economics at Lakehead University and a contributor to the economics blog Worthwhile Canadian Initiative.