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At Issue
Living in our 64 Cent World
Tuesday, December 17, 2002
Living here in Chatham-Kent, it's difficult to fully comprehend the booming Ontario economy. We've had our host of problems especially when you consider the impending closure of the Navistar truck plant. When you combine that with the Q3 closing in Wallaceburg and two straight years of drought on area crops, we're definitely in need of a shot in the arm.The booming economy is much more noticeable in other parts of the province. I lived nine years of my life in and around the city of Guelph, Ontario. When I go there now, I hardly can believe I used to walk the streets. My old neighbourhood changes weekly. There are jobs and wealth everywhere. If only we could get a little bit of that in Chatham Kent.
Maybe we will if Mayor Gagner and council can muster up some business. In the meantime, we'll probably have to settle on some sloppy seconds. Growth in Guelph does have some effect on us, but with our heavy dependence on agriculture and the automotive industry, an injection of confidence would go a long way to making things better. At least we have the venerable Canadian dollar.
The simple fact is we are living in the 64 cent world. With a free trade agreement with our largest trading partner, the dollar gives us an additional 40% cost advantage going into the United States. Since we send over 80% of our exports into the United States, the low value of the Canadian dollar is extremely important. Thousands of Canadian jobs depend on it.
The other side of this argument has everything do with "efficiency". Yes, the economy is booming partly because of a low Canadian dollar, but that could also be our Achilles heal. That's because with such a cost advantage going into the United States, there is a built in disincentive to compete. It is almost too easy.
This is reflected in some ways by the capacity levels we find in our economy and its relationship with the value of the Canadian dollar. Capacity is a measurement of efficiency. Think of a factory which can utilize 100 workers but it only has 65 working. In other words, the factory is working at 65% capacity. If work could be found for 35 others, the
factory would be working at full capacity.
According to a recent Globe and Mail report, in the year 2000, Canadian factories were running at about 86 per cent of full capacity, while their US counterparts were at 82 per cent. By the end of 2001, capacity rates had fallen in both countries, down to 79 per cent in Canada and 73 per cent in the United States. Since that time, Canada's capacity rate has jumped to 85% while the US rate has stayed at 74%. Clearly there is something going
on here.
That has to do with the 64 cent dollar. In the late 1980's and 1990's when the dollar was over 80 cents US, capacity rates in Canada were lower than that of the United States. Capacity rates closed when the loonie hit 73 cents. After that, the long slide down has resulted with higher capacity rates for Canadian manufacturing. Most of those jobs are directly related to an anemic 62-64 cent loonie. With the inevitable rise in the Canadian
dollar sometime in the future, it's obvious we'll have to get more efficient to keep those jobs.
This scenario doesn't bode well for getting more jobs in Chatham-Kent. But what if the dollar doesn't go back up to 73 cents? That's hard to imagine for a lot of people. I can get dozens of my economist friends to tell us that the Canadian dollar will work toward 70 cents US by the end of next year. But you could never get anybody to line up and say the dollar is headed toward 58 cents. That scenario is just too "out there" for any right minded economist to predict. But of course, nobody ever predicted the dollar would go to 62 cents.
In 1987 I met private citizen Jean Chretien at the University of Guelph. I met him after a speech where he asked why we needed a free trade agreement with the Americans when we already had a trade advantage with a 85 cent dollar. 15 years later he sits in the PMO with a free trade agreement and a dollar at 64 cents. Back in 1987, that would be right out of science fiction.
But the bottom line is, the low dollar has become the wine we've all got drunk on. When that changes someday, it'll be a rude awakening. The challenge will be to recognize what the low dollar has really done. And at the end of the day, prepare yourself for the long road. back.
Philip Shaw, farms 830 acres near Dresden, Ontario. He holds a Masters of Agricultural Economics and Business Degree from the University of Guelph and is a well-known commentator on agricultural issues in print, on radio and over satellite in Canada and the United States. In the Chatham-Kent Times, Phil will use his frank and forthright writing style to address political and economic issues from the local to the international stage. He is a keen observer of political life at all levels, reads widely and has travelled the world to gather fodder for his column. See what's At Issue this week.
