David R. Henderson  

Don't Worry About Canada Becoming a 'Petrostate'

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But imagine that Canada's oil production grows so much that it becomes as important to Canada as oil is to Saudi Arabia. Is that bad?

No. First, Canada is a vibrant democracy with competitive political parties and a fair amount of civil and economic freedom. Not so Saudi Arabia.

Second, although many people, including Smith, worry about "Dutch disease," a situation where strong oil exports keep the value of the currency high so that manufacturing suffers, Dutch disease isn't even figuratively a disease. It's just simple comparative advantage. The exchange rate is a price. It signals whether it makes sense to produce and export more oil or to produce and export manufactured goods.

There are many things to worry about in the Canadian economy: the growing level of federal debt, government pensions that are high and rising, and a heavy degree of regulation. Something not to worry about: more oil production.


This is from David R. Henderson, "Don't worry about Canada becoming a 'petrostate'", Fraser Forum, June 27, 2016. It's my response to Noah Smith's unfounded worry.


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COMMENTS (7 to date)
Philo writes:

In his piece Smith suggested that the Canadian government "cut subsidies to the oil industry, including public-relations support. A more controversial move would be to scale back big oil-centric infrastructure projects. These are risky moves, because they represent bets on the future of technology and markets -- what some people pejoratively refer to as 'picking winners'.” But if the government is giving special benefits to any particular industry it is thereby "picking a winner"; *stopping those special benefits* is *refusing* to pick winners, not at all objectionable or "risky." And Smith's point about infrastructure reminds us that it can be hard to discern what policies should be considered neutral as between different industries. If the government widens a public highway that is being heavily used by oil trucks, is that a *special favor* to the oil industry, or just a normal response to the public demand for highways?

Mr. Econotarian writes:

I have to disagree. "Dutch Disease" is a symptom of government monopoly monetary systems. If Canadian oil companies sold oil for gold, it would not change the price levels for other exports relative to goods in other countries sold for gold. Replace with Bitcoin, etc.

jon writes:

David R. Henderson writes:

government pensions that are high and rising
Oh the humanity. People who spent their productive years working for the government getting the benefit of a dignified retirement. If we can cut the pensions, we can reduce the incentives for competent people to work for government, and then we can complain about our incompetent government.

LK Beland writes:

Prof. Henderson,
The economics underlying your argument certainly is solid.

However, from the point of view of a French-speaking Québécois, good economics are likely not enough. Leaving Québec and moving to an English-speaking province can be culturally painful, even though it makes sense from a personal finance point-of-view and from a macroeconomics point-of-view.

Mind you, I see no easy solution to this problem, short of a Québec Franc.

Philo writes:

@ jon:

You are "generous"--with other people's money!

Jack PQ writes:

Stephen Gordon has a good piece in the Canadian news magazine Macleans where he gives a lot of detail on the origins of the concept of Dutch disease and shows it's pretty much nonsense. Canadians are better off with an oil boom.

http://www.macleans.ca/economy/business/why-do-they-call-it-dutch-disease-anyways/

Also:
http://worthwhile.typepad.com/worthwhile_canadian_initi/2012/05/dutch.html

jon writes:

Philo writes:

You are "generous"--with other people's money!
I'm curious, how low would government pay have to be for it to be acceptable to you.

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