The debate about “Dutch Disease” is focused on the relationship between natural resource export booms, currency appreciation and the decline of Canadian manufacturing. I decided it was worth hunting up some long-term data on manufacturing’s share of Canada's economy given that my economic history background tells me that over the long-term, the share of the economy in goods production has declined while that of services has risen.
It turns out it is not a simple task to calculate a consistent long-term manufacturing to GDP ratio for Canada’s economy. The best I was able to come up on short notice was three separate series with some overlap. The first series is from Historical Statistics of Canada (F56-75) for GDP at factor cost by industry. The second series was GDP by industry at factor cost (durable and non-durable manufacturing) for the period 1961 to 1997 (v334558, v334560, v334561). The third was a similar series but in constant dollars for the period 1981 to 2011 (v41881478, v41881488, v41881489). What I want is the manufacturing share of GDP and I have plotted that in Figure 1 for the three series.
What Figure 1 illustrates is that there has been a long-term decline in manufacturing’s share of Canadian GDP. The M/GDP ratio rose from 1926 to the WWII period and then began a long-term decline from just over 25 percent of GDP. The period from 1980 to 2000 sees a halt of that long-term trend but since 2000 the decline appears to have resumed and at a very steep pace. Figure 2 illustrates these trends a bit more clearly. I have combined the three series into one by taking the average during periods of overlap.
I think what has happened is that the period from 1980 to 2000 saw a stabilization of manufacturing’s share of GDP at about 17 percent. This stabilization came after several decades of postwar decline in the ratio but has become the “new benchmark”. This stabilization took place during a period where our currency depreciated substantially 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 US dollar was close to par. The period from the 1970s to 2001 saw a period of depreciation but since 2001 the currency began to appreciate relative to the US dollar and is now where it was for much of the period 1945-1975. The most recent plunge in the manufacturing to GDP ratio is associated with that most recent appreciation with much of that manufacturing loss in Ontario.
Is this Dutch Disease? If it is it has been a very sustained and chronic long-term disease. Manufacturing as a share of GDP in Canada has been in decline since the end of the Second World War from a peak of almost 30 percent that was due largely to wartime industrial policies. Until the Second World War, the manufacturing to GDP ratio ranged from 20 to 25 percent and had actually been in that range since the 1870s based on the Green-Urquhart numbers. Despite this long-term decline, there have been short-term reversals fueled in part by currency depreciation – the most sustained being that from 1980 to 2000. Relative to the benchmark of the period from 1980 to 2000, the current decline in manufacturing is understandably a cause for concern. However, viewed over a longer time span, it is part of a long-term trend dating back over half a century much like the decline of agriculture as a share of both employment and output as we moved from the nineteenth and into the twentieth century.