FP Comment
Everybody’s Dutch
May 29, 2012 – 7:51 PM ET
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.
