The misguided notion that the shift from manufactured exports to resource exports is necessarily a bad thing has taken ferocious hold on many politicians and on much of the punditry. So I'm recycling something I wrote before to explain why it's wrong.
This is an extract from a column I wrote for Canadian Business magazine:
Suppose that we live in a country where everyone eats only doughnuts. We’re self-sufficient except for one thing: we need to import bananas to make banana cream doughnuts. Happily, foreign producers are willing to exchange truckloads of trees for truckloads of bananas. So some workers spend their time cutting down trees to send abroad, and the rest of us work on making doughnuts.
Now let's suppose that foreigners are no longer satisfied with trees: they will now only exchange bananas for furniture. Some workers must therefore stop making doughnuts and start transforming trees into furniture for export. Even though the national accounts would record an increase in the value-added of exports, this development is bad news. The reallocation of workers away from doughnut production means that we make and consume fewer doughnuts.
What happens if foreigners go back to accepting trees for bananas? The workers who had been making furniture for export can go back to making doughnuts. Although the national accounts would show a reduction in export volumes, we are clearly better off: doughnut consumption will have increased.
This is obviously not a realistic representation of the Canadian economy, nor is it meant to be. But it corresponds closely to what happened in the last two expansions in many important dimensions. In the early 1990's, commodity prices fell, and the only way for us to obtain the imports we wanted was to shift workers to the manufacturing sector, and to increase the value-added of exports. But devoting more of our productive capacity to making things that are to be consumed by foreigners isn't a path to prosperity, and workers' real buying power stagnated.
In 2002, commodity prices rose, and we were able to get the imports we wanted with less productive resources allocated to the export sector. The expansion of 2002-2008 was characterised by a shift out of export-oriented manufacturing, and these workers were able to produce more for domestic consumption. Exports volumes stagnated, but since we were getting better prices for what we sold to the rest of the world, real incomes increased.
Possibly the most important part of this parable is that it assumed that laid-off furniture makers could simply go back to making doughnuts. What about those 300,000 manufacturing jobs lost in the real-life Canadian economy?
It turns out that almost all of that decline can be explained by attrition: workers who left the manufacturing sector were not replaced. Layoff rates - and in particular, permanent layoff rates - remained fairly constant, and they were generally lower than they were during the 1994-2002 expansion. A manufacturing worker was less likely to have lost her job during 2002-2008 than she would have been during the latter half of the 1990's.
(The inspiration for this story was of course Krugman's hot dog parable.)