We Are Not Alone...

One more bit of quick evidence on manufacturing and its share of GDP - this time, international evidence.  I found some data from the United Nations for the period 1970 to 2010 and calculated the manufacturing to GDP ratios for Canada, the other six G-7 countries as well as Brazil, China, India, Australia and also the Netherlands.

  If we are going to talk about "Dutch Disease" it seems only fitting that we include the Dutch. Figures 1 and 2 provide two perspectives on the evolution of the manufacturing to GDP ratio.

The results show that all of the G-7 countries have seen a decline in the share of GDP accounted for by manufacturing.  It would be a stretch to argue that they are somehow all suffering from "Dutch Disease".

Japan and Germany have traditionally had the highest G-7 manufacturing to GDP shares but nevertheless declined from 35 and 31 percent respectively in 1970 to 20 and 19 percent by 2010.  Over the same period, Italy went from 25 to 15 percent, the United States from 24 to 13 percent, Great Britain from 29 to 10 percent, France from 22 to 10 percent and Canada from 19 to 11 percent.  In 1970, Canada already had the lowest manufactuirng to GDP ratio of the G-7 countries.  Australia and the Netherlands have had performances comparable to the G-7 when it comes to the evolution of their manufacturing to GDP ratios.

As for the so-called BRIC countries - Brazil paralleled the performance of the G-7 going from a manufacturing to GDP ratio of 25 percent in 1970 to 13 percent by 2010.  China and India, on the other hand, have largely maintained their manufacturing sectors relative to their GDP.  However, India's manufacturing to GDP ratio was 13 percent in 1970 and is still at 13 percent in 2010.  China is the exceptional performer with a manufacturing to GDP ratio of 37 percent in 1970 but with a small decline to 33 percent by 2010.

The decline of Canada's manufacturing sector has parallels with other countries.  Our experience parallels Australia - which can be viewed as a resource staples or 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 early stages of transition from agricultural to industrial development.  Canada certainly fits into that pattern prior to the Second World War.  China certainly can be seen as an economy that over the last forty years has been transitioning from agriculture to industry but on the other hand it had a high manufacturing to GDP ratio even fifty years ago when relatively underdeveloped - no doubt the legacy of centrally planned industrial policy.  India on the other hand has had quite a different performance from China in this regard. Certainly interesting stuff.

Comments

[Simon van Norden]

Livio;

I don't think you responded to my comment on your last post, so I'll have to ask again.

1) Who precisely do you think is claiming that Dutch Disease is the only long-term influence on manufacturing's relative importance?

2) For that matter, just who is claiming that Dutch Disease is important on such long time-scales? The original claim about the impact of North Sea gas discoveries on Dutch manufacturing was on the impact over the space of 5-10 years (give or take.)

Most models of Dutch Disease predict a decline in manufacturing (a) when the discovery of new reserves or deposits expands the natural resource sector, or (b) when world prices for the exports of existing natural resource industries rise. Perhaps you could look into that.

[Livio Di Matteo]

Hi Simon:
There are a number of issues here. Dutch Disease per se is as you describe - tied to a short term boom with currency appreciation. There was a formal exposition as a "booming sector model" done by Corden and Neary. The long term decline in manufacturing is a function of long-term forces but in the short term the long term trend could be accompanied by the effects of currency appreciation due to a Dutch Disease type effect. I'm not sure I exactly follow your questions? I've posted some data on longer term trends to argue that there has been a long term decline in manufacturing's because of the recent concerns over manufacturing particularly in Ontario but also the debate involving Mulcair. The Ontario premier some weeks ago made comments that suggested he was blaming Ontario's manufacturing decline on currency appreciation related to the resource boom in the west - a Dutch disease type story though he did not use the term.. My point is that there has been a long term decline in manufacturing's share of GDP and it is an international phenomenon. Even if Dutch disease explains the recent drop, the fact is M/GDP has been dropping for a long time as a result of long term forces. Have I missed something?

[Bill]

What happened in Brazil in 1990 (~27% to 19%) and China in 2005 (~42% to 32%)?

[rsj]

Manufacturing was considered special because it was the primary recipient of technological change and allowed for large increases in productivity as a result of increasing returns to scale. That is why Antonia Serra called "A multiplicity of Manufacturing Enterprises" the main reason for why some nations are wealthy and other are not.

At that time -- during the first industrial revolution -- it was the only such industry, and Serra was right.

This role is now also played by Information Technology, Biotech, and other industries. With the onset of industrial agriculture, it was also true of farming, although we no longer see the same productivity growth rates there.

In the future, it may be true of other industries as well.

Really, it is a tautology: total output is the sum of output across all industries, which is the sum of output per unit worked in that industry * hours worked * productivity of the industry.

By definition, those nations that succeed in fostering more productive industries -- whether they be manufacturing or IT -- will enjoy more output.

To the degree that productivity results in higher wages per unit of time worked, people want the composition of jobs to be focused in the more productive industries, and more importantly, in industries that have a bigger potential for productivity growth. If they are to be relegated to working for less productive industries, then they want income transfers, economic rents, or assurance of spillovers to ensure that they continue to get increasing living standards as well. Ultimately those transfers/spillovers have to come from the more productive industries, and are reliant on the existence of those industries. A teacher, doctor, or waiter in Nigeria do not have as high a standard of living as their counterparts in San Francisco, even though they basically produce the same output. But those spillovers do not come automatically or for free. If there is labor competition or low transport costs or trade, then merely being in the same country as an increasing return industry may not be enough to ensure that you get the spillover. That is a recipe for stagnant real wages, or for having a third world enclave of low wage workers within your own border.

Therefore even those not personally employed in increasing return industries have a vested interested in fostering the well being of these sectors near to them, and ensuring that the transmission mechanisms of spillovers remain intact. That is why there is such concern about manufacturing.

[Simon van Norden]

Livio;

Thanks for the response....I thought you were missing something....but perhaps I misinterpreted your intentions.

I thought you were trying to shed light on the issue of whether resource boom that has helped Western Canadian (and other) resource industries has hurt Canadian (and esp. Ontario) manufacturing.

Was that not your intention? If not, my bad and sorry for the confusion.

SvN

[The Keystone Garter]

What I see from that graph is everyone lost manufacturing to Chindia. Brazil is an outlier. I know they are big sugar cane and aerospace...why isn't Brazil more like China.
Anyway, if petro resources were to continuously provide ever more revenue or even plateau at present levels. No problem. Eventually we'd build service-sector schools and fast food and turn Fort McMurray into Saskatoon. A point is, AGW will cripple demand for carbon-intensive sources. AGW will cripple very probably China, and probably India. And Africa.
You can switch off manufacturing jobs in the St.Lawrence lowlands, cities, without too much pain. If we or AB and SK or whoever, does nothing with their revenues from petro except build suburbs, build service sectors dependant on petro employees's trickle down...http://www.youtube.com/watch?v=RAeJ2RSNc0A&feature=player_embedded

This is a German company that makes tool-and-die machines and metal lathes and stuff. This is one of the means of production. With continued R+D and stuff, we could copy them. We have advantages like a young population and most metals. And hydro. And theoretically less debt than USA. Chindia won't be able to copy this for a while. There won't be any demand for oil; we might all be Albertans but the world is exposed to AGW. I suggested those wind turbines to Cali as a way to spend cap-and-trade revenues. I'm suggesting we don't assume this manufacturing income to petro income, will last. If we wait until then to shift back into manufacturing or whatever low footprint income source the world demands, we will be competing with Africa or India for jobs instead of China, USA, or even the zee Germans.
You can't brainwash people after AGW events.
Take away AGW, and this becomes a thread about how to build cities north of the Yellohead that resemble St. Lawrence lowlands.

[The Keystone Garter]

..figure 2025-2040 for first climate event that kills coal and tar globally, in one year. Right around when boomers get sickly and old...

[Jacques René Giguère]

rsj: "A teacher, doctor, or waiter in Nigeria do not have as high a standard of living as their counterparts in San Francisco, even though they basically produce the same output."
You might be intersted by this from

http://conversableeconomist.blogspot.ca/2012/05/mcwages-around-world.html

" Orley Ashenfelter has been looking at one set of jobs that are extremely similar across countries--jobs at McDonald's restaurants. He discussed this research and a broader agenda of "Comparing Real Wage Rates" across countries in his Presidential Address last January to the American Economic Association meetings in Chicago." The link to the paper is provided there.

[The Keystone Garter]

...all this miraculous service sector that's been soaking up employment; the plan is to move doctors and nurses and mcworkers and minimum wage clerks, to non-petro cities where there are no hospitals and houses built, and no German tool-and-die makers? It is a pyramid with an industry that has a 20 year life (natural gas might be okay) at the base. Resources don't R+D. Branch car plants don't R+D. Other than our own demand (like Japan and Germany rebuilt themselves after WWII with good human capital intact), we'll have Russia to export to. We can't go back to cars: Alabama or wherever is paying $16/hr. Need to find something else. Colbert had a hippie on who spoke of a sci-fi rotovator, but also a nerf car. That is a transition for us away from materials, to materials science. I guess AB could save like Japan did (4 yrs income), and get some cushion...

[ianlee]

Livio - your data, graphs aznd analysis are most useful for they are comparative across nations over the post world war II period and consistently demonstate a similar trend across these countries suggesting deeper trends unfolding.

Before dealing with that issue, I recall a prof from my undergraduate experience many years ago, who was originally from India. He noted that a young person fortunate enough to escape the farm to attend university had a very bad habit of having no interest in returning to the farm. As someone who grew up on a farm doing hard physical labour in the 1960s, my distinctly strong memory of the value of working on a farm was to motivate me to never want to work on a farm (or in mfg) doing hard labour. Marx said it best, when he spoke of the "idiocy of rural life", contra those urbanites and faculty that romanticize the rural life without any understanding of what it was really like. I suspect that working on the line was no fun either.

But to return to the overarching issue of the decline in mfg, it is even "worse" for those who see the decline of mfg as bad. This issue was first raised (I believe) by James Brian Quinn at Darmouth in his analysis of the rise of services in the 20th century.

He noted that the US Census Bureau and the BEA classified entire firms as e.g. mfg, in the NAICS classification system. The statisticians (understandably) did not attempt to discriminate intra firm in terms of those that actually worked on the line vs e.g. the HR office. Thus, IBM was classified as a mfg - although the vast majority of IBM employees do NOT work on a line.

Unfortunately, I do not have empirical data on this issue. But I hypothesize that the majority of people employed at Ford or GM or Westinghouse or GE - in mfg firms in Canada and the US - work in marketing, finance, advertising, dealer relations, govt relations or R & D etc while only a small number of employees actually work on the mfg line. Thus, Quinn suggested the actual numbers employed in mfg were much smaller than commonly thought - perhaps 5%.

But this in turn suggests that the traditional Manichean dichotomy between goods (mfg) and services supplied is overdrawn. If more and more of the value of the mfg good is "intelligence" or service embedded in the physical product or if the product can be "de-materialized" from atoms into bits (Negreponte, Being Digital) as CDs or books are digitized, then value creation is being transformed such that Detroit is displaced by San Jose etc. and products eg hard drives, have been transformed into services e.g. monthly service payment to store images or data on cloud computing.

Maybe, the debate concerning the decline of mfg is in essence a debate between industrialists living in the pre digital era nostalgic for the world of the post office and GM et al vs post modernists who understand that value creation has been substantially transformed via Google, Apple and cloud computing to name but one manifestation.

Possibly, the "decline of mfg" in part reflects these transformations in our economies.

[Shangwen]

I find this discussion interesting in light of Arnold Kling's writing about the "new commanding heights" of the US economy, i.e., that health care and education will become the dominant economic activities. Given that these are heavily regulated and have doubtful productivity with much rent-capturing, perhaps there is a future wave of nostalgia coming about the non-health/ed service sector that will not be quite so misplaced.

[Bill]

OK, five hours later, and the "exper"t author has not bothered to answer a question about the data he posted to support whatever his political view is on this topic.

So, as a public service, allow me to try to answer my own question, despite my academic unqualifications: What happened in Brazil in 1990 (~27% to 19%) and China in 2005 (~42% to 32%)?

The Chinese RmB was allowed to float in 2005 http://www.china.org.cn/features/60years/2009-09/16/content_18537912.htm, and in 1990 Brazil reintroduced the Cruzeiros http://www.kwintessential.co.uk/country/brazil/currency-money-brazil.html

Gawd

[Stephen Gordon]

Bill, Livio doesn't work for you. Change your attitude.

[Bill]

Thanks for the reminder.

If my interpretation is correct, however, does this not suggest
that a sudden shock (for these two countries) to currency exchange rates affects man. in a long term way?

If declining % GDP for man. is inevitable, would not a more gradual transition be more advantageous in terms of social costs/efficiency/training/immig.?

[Livio Di Matteo]

Bill:
Shocks to currency exchange rates can definitely have a short term effect on manufacturing - not so certain about the long run. In the case of China, the M/GDP ratio dropped suddenly but then stabilized at a level close to what it was in 1970. Brazil continued to decline at a slow rate after its 1990 drop. Do not know enough about China and Brazil's economic structure to say if any other other unique long term factors have been at play. Brazil's pattern of long term decline in M/GDP fits in with the G-7 countries. China and India have been different to date in that they have not had a long term decline ... yet. Over the decades to come, I would expect China's service sector's share to eventually grow and manufacturing's to decline. As for India, it's manufacturing sector's share is already quite low so I'm not sure if that is because it's service sector has already grown or perhaps because it has a larger agricultural sector share than China.

[Determinant]

ianlee:

Unfortunately, I do not have empirical data on this issue. But I hypothesize that the majority of people employed at Ford or GM or Westinghouse or GE - in mfg firms in Canada and the US - work in marketing, finance, advertising, dealer relations, govt relations or R & D etc while only a small number of employees actually work on the mfg line. Thus, Quinn suggested the actual numbers employed in mfg were much smaller than commonly thought - perhaps 5%.

No.

Living as I used to in Peterborough, I knew GE (first plant in Peterborough) and GM is in Oshawa. GM's Canadian service office in Oshawa and it is one building a few stories high; the plants are of course huge. The workforce is also large, affecting not only Oshawa and Whitby but Peterborough as well.

GE is also labour-heavy, "services" as you describe typically amount no more than a third of manufacturing personnel.

The avionics firm I worked at for one summer had a head count that was half production and half design, avionics is a very design-intensive thing and the customer paid for the design as well as the production, it was part of the direct marginal cost.

However these items (marketing, finance, advertising, dealer relations, govt relations) are more "parasitic" in nature, their utility is not directly related to production volume and they tend to stay at a more uniform, lower level.

[The Keystone Garter]

http://www.reuters.com/article/2012/05/01/us-semiconductors-manufacturing-idUSBRE8400N920120501

Advantages and disadvantages of chip-plant locations (have to be located carefully). If we go the software route, who pays for it (petro engineer still highest paying occupation)? Ideally a carbon tax. Or do petro-sector (and aluminum and whoever else is bigfoot) employees themselves pay for it instead of big cars big homes? Say, future engineering education as an income deduction instead of EI?
I like the idea of building little machines that latch onto our cholesterol in arteries, and mitigating without causing strokes and blockages. I like designing holographic university courses. This is R+D at about 5-10%. We should charge/incent finance, petro and government.
The Central Bank can make industrial policy, can hold illiquid assets. Right now the difference between current R+D and needed R+D is an illiquid asset. And the difference between sectors of the future and current sectors, a potential industrial policy. I suggest this knowing the human capital of M.Carney.

[The Keystone Garter]

In China and India the locate all their capital where they have Himalayan runoff. So if not petro-to-manufacturing, petro-to-what? I wasn't able to stop the Himalayas from melting.

[ianlee]

Determinant

From the BLS:http://www.bls.gov/iag/tgs/iag31-33.htm

"About the Manufacturing sector"

The manufacturing sector is part of the goods-producing industries supersector group.

The Manufacturing sector comprises establishments engaged in the mechanical, physical, or chemical transformation of materials, substances, or components into new products.

Establishments in the Manufacturing sector are often described as plants, factories, or mills and characteristically use power-driven machines and materials-handling equipment. However, establishments that transform materials or substances into new products by hand or in the worker's home and those engaged in selling to the general public products made on the same premises from which they are sold, such as bakeries, candy stores, and custom tailors, may also be included in this sector. Manufacturing establishments may process materials or may contract with other establishments to process their materials for them. Both types of establishments are included in manufacturing.

North American Industry Classification System

The manufacturing sector consists of these subsectors:
Food Manufacturing: NAICS 311
Beverage and Tobacco Product Manufacturing: NAICS 312
Textile Mills: NAICS 313
Textile Product Mills: NAICS 314
Apparel Manufacturing: NAICS 315
Leather and Allied Product Manufacturing: NAICS 316
Wood Product Manufacturing: NAICS 321
Paper Manufacturing: NAICS 322
Printing and Related Support Activities: NAICS 323
Petroleum and Coal Products Manufacturing: NAICS 324
Chemical Manufacturing: NAICS 325
Plastics and Rubber Products Manufacturing: NAICS 326
Nonmetallic Mineral Product Manufacturing: NAICS 327
Primary Metal Manufacturing: NAICS 331
Fabricated Metal Product Manufacturing: NAICS 332
Machinery Manufacturing: NAICS 333
Computer and Electronic Product Manufacturing: NAICS 334
Electrical Equipment, Appliance, and Component Manufacturing: NAICS 335
Transportation Equipment Manufacturing: NAICS 336
Furniture and Related Product Manufacturing: NAICS 337
Miscellaneous Manufacturing: NAICS 339

Then, I looked at the BLS employment numbers for mfg:

http://www.bls.gov/iag/tgs/iag31-33.htm

Workforce Statistics

This section provides information relating to employment and unemployment in manufacturing. While most data are obtained from employer or establishment surveys, information on industry unemployment comes from a national survey of households. The following tables present an overview of the industry including the number of jobs, the unemployment rate of those previously employed in the industry, job openings and labor turnover, union membership and representation, gross job gains and losses, mass layoffs, data for occupations common to the industry, and projections of occupational employment change.

For the US, as of April 2012, it stated, 11,947 i.e. 11.9 million employed in mfg.

It then provided a break down: Employment by Occupation

The BLS table stated - IF I am interpreting the table correctly - that about 1.5 million people are employed as machinists, team assemblers, inspectors, testers, samplers, weighers, production workers - of the 11.9 milllion employed in mfg.

If my interpretation is accurate, only 12% of total mfg employment are actual assemblers, machinists etc. Likely because the part of mfg that has been most automated is the repetitive line assembly process with lots of robots. But I will defer to the resident stats number crunchers on WCI - Stephen and Livio to determine if my interpretation is accurate.

Restated, contrary your characterization of marketing, finance, et al as parasitic, in fact the substantial value added in the mfg sector is no longer the actual mfg on the line - which has been transformed into photocopying the recipe (provided by the brilliant design engineers).

The substantive value added is the services inside the mfg firm such as design and marketing and creating new demands and finding new customers. Steve Jobs is Exhibit A.

Contra finance and accounting profs and people that do not understand the market economy (because they have not internalized Schumpeter's ideas on entrepreneurship, creative destruction or the business cycle), the purpose of the firm is NOT to maximize shareholder value. The purpose of the firm is to create something that is more valuable to customers than the competitors. If you are an airline, that means arriving and departing on time, not losing my luggage and not crashing the plane and at a lower cost than the competitors - the fundamental value proposition (and why I fly Lufthansa wherever possible - they may have no sense of humour but that plane will depart and land safely on time and they do not lose my luggage).

Note that if your firm is really good at creating value - and not destroying value - potential customers will buy your product or service and as a by product, the firm's shares and market cap will increase and the shareholders will become more wealthy.

As Coase, Williamson and Porter amongst others realized, the firm exists to create value for potential customers by creating a product or service that provides value to the customer. Yes, it is tautological but so what? And finance and marketing and design amongst other functions, all contribute to value creation.

[ianlee]

Sorry - forgot to make one final point.

Those critics that condemn "greedy corporations for making so much money or profits", properly understood, are condemning these firms for creating "too much value for their customers", because the gross revenues and the net profits arise from selling services or products to willing customers.

Should these firms do something bad - that frighten away customers and in turn will cause the share price to decline - in order to become less successful in serving their customers?

To return to the airline example, on the rare occasion that a commercial airline experiences a devastating plane crash, it has been observed that the share price of that airline drops dramatically for some time after the crash, reflecting customer cancellations who assume the airline has safety problems. Surely, no one is suggesting that this is a good thing - even though it makes the airline less profitable.

We want firms to create more value - not less value - and thereby make more money and employ more people and pay more taxes (corporate and personal) that then support public goods such as universities.

[Bob Smith]

I wouldn't have used GE as the example of the value of manufacturing since last year a good third of its profits were derived from its financing subsidiary, GE Capital (granted, that number has bounced around with the economy, but back in 2007 GE profits were almost 50/50 from "manufacturing" and finance).

[ianlee]

Thanks Bob. Agree completely. I simply forgot about GE Capital - one of those near banks that Carney wants to regulate. And I agree with him that near banks should be regulated to the same high standards as our Cdn banks (but then so should the European banks - for they make American banks appear sound - but now I am dreaming).

[Patrick]

I'm with Shangwen. When we're all employed wiping (better check that spelling ... don't want to go all 50 shades of gray on everyone) granny's bottom, we'll look back on the good old days of the Starbucks barista and the Fort Mac welder. Not so sure about education, though. The guys in the neighboring cubes both have PhDs. Has the world come to the point where you need a PhD just to be cubicle serf? In any case, be sure to talk to your kids about the dangers of a career in Engineering or Computer Science. Just say 'no' to knowing and doing. Biz skool, finance, accounting, that's where its at. Just as the charts show.

[The Keystone Garter]

Our employer clssifications in Canada are similiar. What is more useful is to look at the employee classifications. That's where you can gauge the fungibility of your workforce. If we figure out how to make materials or drugs out of crops, that may be coded as Agri but seems alot like materials science to me. Someone on one of these thread described the tar sands as construction; so presumably those workers could build other things.
I tried to get a robotics repair technician job but it was filled and they kept sending me back to a freezer I basically needed to cut off my co-workers in the aisle to make production. Mormons fired me before I could learn some plastics. I attended a great trades HS but didn't take anything but autocad: stupid.
An oil grunt can work on an assembly line just like car workers; neither will make $#)+/hr in the future. The service sectors that serve the spillover will be cut. Gotta look at the future change in spillover. And if economists, cdn politicians, and CoC won't learn AGW, find me someone who can.
I wish the legend was on the left...
GE medicine is amazing; check out their blog. Their problem is USA relies on consumer demand for medical procedures. Consumers in distress are dumb. If we had a chart that showed what $$ created longevity or quality-of-life gains (I get mild back pain sitting for a few hours, healthier than most, I know current back surgery doesn't work well but I'd try future procedures), we could make our own machines and then export them. Further up the chain from assembly jobs are the milling and electroplating jobs and robot repair (most is skilled that one I applied for wasn't). At the top are the companies that make the wills and CVD furnaces (might be carbon heavy), and lasers. This is very technical. To me, these are the safest industries to aim for but require constant R+D. Supplying raw materials is the lowest. It works while resources prices are high. If you assume people don't need reliable harvests and industries don't need freshwater we could just keep being AB 4ever.

[The Keystone Garter]

ianlee, in late 1990s oil was $8 barrel. We were taught in school about a strawboard plant being the future. It used oil as a raw material.
In 2001 everone talked about West Jet. It used low oil prices. Everyone assumed the information revolution would make oil obsolete, yet chip plants and everything else are shipped across the world.
In Wpg, we were taught about turning the city into the northern leg of a transportation hub all the way to Mexico. In retrospect, rail lines to Churchill, Thunder Bay, and Chicago were the wise investment. South of the city floods 2-3 days a year which ruins the just-in-time supply chain. Weather anamolies will ruin future Chinese manufacturing...
Anyone could see oil was not going to stay at $8 barrel. IDK the future oil price, but anyone can see carbon intensive economy will shrink. Most cities made bad publicly funded plays on bigger airports rather than twains.

[The Keystone Garter]

"We want firms to create more value - not less value - and thereby make more money and employ more people and pay more taxes (corporate and personal) that then support public goods such as universities."
"When we're all employed wiping granny's bottom"

I applied, they wanted me to fix medical machines, but I chose the medical equipment disinfecting course, 9 months long (putting hand tools in bleach casically). I'd been denied welfare years ago and no one hired me. Weird, I was in a school play about my city's General Strike and now turned into Cgy...
It was an Indian trades school, and the Indian clerk was brutal. She sent me downstairs to the wrong room and when I came back up she said I was too late. I went to the second portion about financial aid; there wasn't any and the guy that setup the meeting was in some conference without leaving me a msg.
It was my last $5 for busfare. I was stuck living with a mentally ill woman in the 2nd coldest city on Earth. They needed 9 people for the class to start. It didn't start as of a year later. So basically the problem was they needed some provinces to be pooled together; I know all firefighters go to Prince George. So cities work. The power to the provinces initiated by the CPC feds, has inefficiencies. Hospital services are costing too much taxes or giving you blood diseases. And white schools should hire Indian staff, and vice versa. Turns out the transfer payment from AB that are in leiu of hydro revenue, didn't help healthcare.

[K]

ianlee: "condemning these firms for creating "too much value for their customers""

Yes, it's all genius. They're all just misunderstood Steve Jobses. Long live Standard Oil!

No such thing as:

-increasing returns to scale

-subsidies, government guarantees, protectionism (your favourite airline, BTW, is owned by a government that prevents my favourite free market airline from taking me from Frankfurt to Tokyo; the Chicago Convention *bans* the taxation of jet fuel for international flights; ...).

-regulatory, licencing requirements

-zoning, control of finite resources

-deliberate incompatibility

-obfuscation, deliberate incomparability

-outright collusion (your credit score declines every time you ask for a mortgage quote)

-concious parallelism

-information asymmetry

-abuse of patents/IP laws/legal system

-bans on secondary markets (airlines, mobile telcos)

-corruption (campaign finance, regulatory revolving doors, bribery)

-mob tactics

That's just off the top of my head. Persistent profits are the rule, not the exception. How much do you want to bet Canadian telcos make money next year? How much you want to bet they never, ever lost money as a group? The Sharpe ratio of their earnings beats the best hedge funds in the world by an order of magnitude. Absolute geniuses! All of them!

Seriously?

[Zamba]

Does exists something like a premature deindustrialization? Because it's a point that's been debated here in Brazil recently. You showed that the Brazilian manufacturing to GDP ratio fell a lot, like other countries, but we are not yet like developed countries. We have a GDP (PPP) of US$ 11,000 and already have a developed nation's ratio, so maybe it's a little bit premature to deindustrialize. Or is it happening in the right time?

I used the data from World Bank to see the manuf./GDP ratio of Argentina and Chile, two developing nations:

Argentina: 1970: 35,5 / 1980: 29,5 / 1995: 17,3 / 2008: 19,4
Chile: 1970: 16,5 / 1980: 14,0 / 1995: 17,8 / 2008: 12,4

Using data from the same World Bank for GDP per capita we have, in US dollars:

Brazil: 1970: 366 / 1980: 1570 / 1995: 4750 / 2008: 8630
Argentina: 1970: 1307 / 1980: 2684 / 1995: 7404 / 2008 8200
Chile: 1970: 969 / 1980: 2637 / 1995: 5000 / 2008: 10165

If you assume that Chile is still growing well, in PPP terms is well above Brazil, and is likely to succeed at the catching up, maybe we can conclude that the manuf/GDP ratio doesn't matter much to explain development, as Chile never had a big manuf./GDP ratio, even when they resembled Brazil (maybe a decade ago).

Or maybe Argentina tells us a different story, as they had a huge fall in manuf./GDP ratio, like developed nations, but are having more trouble to converge to their levels of GDP per capita.

Any thoughts on that?

Zamba

[Determinant]

ianlee:

*Sigh*. Lessee, quotes Austrian economics, has a massive pile of statistics which mean very little (NAICS codes), fails to understand the role of design, purchasing and other role in he production process (nice narrow defintion of production there. Far too narrow). Yep, heterodox economics meets inexperience of actual production. Further misunderstands that marketing, accounting and finance, as derivative activities, have no value outside the original product. Too much derivative activity without underlying production is a hype without substance.

Yep, nice example of heterodox economics veering into dogmatics.

Further, is it just me or does the economists on this blog fail to see the value of additional stages of production? Is it really to hard to understand Dofasco's business model? They don't make commodity hot-rolled steel, which sells for commodity prices (poor profits). It is the cold finishing processes that elevates their production into extra-value, high profit, high-margin goods.

"Yes, it is tautological but so what?"

Ever take a logic course?

[ianlee]

Determinant

You bring back fond memories of debating the Waffle wing of the NDP in undergrad in the early-mid 1970s and in my PhD student debates in early 1980s concerning the NEP and the "clear advantages of relying on the wisdom of an industrial policy" articulated by highly informed, wise public servants armed with superior knowledge in the Dept of Energy, Mines and Resources and in Dept of Industry, Trade and Commerce.

One (very bright, indeed precociously intelligent) part time student who was a rising public servant (who will remain unnamed as he is now a senior public servant in Ottawa ) was utterly convinced that the public service had access to much more accurate and more comprehensive data (he claimed) and had a strategic horizon much longer than the next financial quarter (he claimed), and thus had far superior insights and understanding (he claimed) concerning strategic decisions such as new markets that firms should enter or the degree of processing that the firm should undertake in Canada or indeed the myriad of corporate and business strategic decisions that firms make. While he recognized that his optimal solution was unattainable in Canada, he certainly supported an industrial policy set in Ottawa on Queen Street (Home of Industry Canada). The hubris and arrogance was breath taking to say the least.

I remember challenging him - using the oil patch - by noting that although he was a very bright guy, he had never ever been employed in the oil industry or derivative industries - indeed had never been employed in the private sector - and I wondered how he could possess a deeper understanding of the machinations, intricacies, nuances, subtleties of the market, competition, suppliers, technologies etc than the people who had been employed their entire lives in that industry. Following Polanyi, I argued he was completely ignoring or assuming away the role of tacit knowledge.

However, this remarkable hubris and arrogance was analyzed far more elegantly by Halberstam in The Best and the Brightest - the intellectuals around Kennedy and then Johnson who took the US into the Viet Nam war.

We had our own best and brightest - the Trudeau intellectuals - that produced the NEP which then shut the Liberals out of western Canada and ultimately led to their demise. Maybe we should celebrate and encourage Mulcair in his Dutch disease frothings and foamings:)

[DavidN]

ianlee,

Has Determinent been arguing for industrial policy?

[Determinant]

I haven't been arguing for industrial policy. As I have, in fact, worked in industry and can tell a purchaser from an engineer from a finance person (by which I mean finance of the producing firm, few firms are like GE which became large enough to support its own near-bank. That is the mark of the truly big players).

The entire business model of Dofasco (or Arcelor Mittal now) is to produce high-value steel products with extra stages of production, and therefore higher margins and profits. They are very honest about their strategy.

Ian, your last argument was a straw man fallacy, attempting to conflate my position with that the NEP and identifying me with the NEP's flaws. I know you are capable of better rhetoric than fallacious arguments. I expected better.

One (very bright, indeed precociously intelligent) part time student who was a rising public servant (who will remain unnamed as he is now a senior public servant in Ottawa ) was utterly convinced that the public service had access to much more accurate and more comprehensive data (he claimed) and had a strategic horizon much longer than the next financial quarter (he claimed), and thus had far superior insights and understanding (he claimed) concerning strategic decisions such as new markets that firms should enter or the degree of processing that the firm should undertake in Canada or indeed the myriad of corporate and business strategic decisions that firms make.

Interestingly, if you substitute "corporations" for government and "pensions" for "industrial policy" you get the exact political position of the pension consultant and insurance industries in Canada. I take it you would argue in favour employer-provided pensions instead of an expanded CPP, yet employer provided pensions suffer from every one of the flaws you list in your argument, and are justified by the same reasoning about the Public Service that you criticize. It is an fascinating parallel.

[ianlee]

Determinant - the last sentence was meant as humour.

But BTW, there are a number of professors and some public servants who still believe in some sort of dirigisme or state directed industrial policy (and there are many more in Europe - paving the way to Europe becoming a giant museum to a failed civilization).

But I do not think you addressed my overarching and fundamental point.

IF you accept my assumption that firms' managers have a deeper understanding of their costs and market opportunities, markets, supply chains, competitors et al than any public servants or professors or external analysts, then it necessarily follows that corporate and business decisions by firms in competitive markets are more rational than decisions made for that industry by outsiders.

For example, if one takes your example that we should refine more in Canada, and examines the refinery industry, one quickly learns that the market in Canada is small while the market in the US is large and supplied by some mega refineries with higher economies of scale. Moreover, the average cost for a new refinery is +$5 Billion - which means that the bankers and the financial number crunchers are going to use very sharp pencils to determine if a new refinery makes sense, and then one discovers that there has been refinery surplus capacity in the US and one realizes that what seems like such a good idea in the abstract does not make sense for industry players.

This is not a laissez faire argument. Indeed, govt has a very important role as the referee of the hockey game - but not a team owner or a player on one of the teams.

Mulcair wants to be both a referee and a player in the hockey game, as he is proposing to manipulate some sectors in order to change an outcome he does not like. Like the court musician in Mozart who was asked what he thought of Mozart's new composition, and then replied, "too many notes", Mulcair is saying, "too many oil exports"".

The proper answer - as Mozart responded in the movie, "no - it is just the right number of notes - is that we are selling just the ""right amount of oil"" (although we would like to sell more).

We need to ensure there is a level playing field - which is why we should be reforming e.g. corporate subsidies, supply mgmt., EI, CIT and eliminating protectionism of telecoms, airlines, banking et al.

We need to reform our corporate governance laws to ensure there are more Ontario Teachers Pension Funds (Canada's secret weapon at work - as an agnostic, may the spirits bless Teachers Pension Plan) working with shareholder activists – think CP - to replace managers with new leadership to maximize revenues and profits i.e. create increased value.

[Determinant]

Mulcair has said nothing of the kind. He has said that manufacturing has suffered under the appreciation of a petro-dollar and that Alberta Oil should pay more of its environmental costs.

The rest has been read in by all in sundry who have resorted to the NEP strawman.

IF you accept my assumption that firms' managers have a deeper understanding of their costs and market opportunities, markets, supply chains, competitors et al than any public servants or professors or external analysts, then it necessarily follows that corporate and business decisions by firms in competitive markets are more rational than decisions made for that industry by outsiders.

That does not follow. Managers have good views of their own firms, but terrible views of externalities. There are emergent properties beyond firms and firm-good does not imply global-good.

I am not a central planner nor do I advocate it. Dealing with the externality of oil-induced currency effects on manufacturing does not imply robbing or suppressing the Oil Patch. You are still attempting to create the left-wing = central planner straw man that the Right has used since WWII and Hayek's "Road to Serfdom". I don't believe in that level of central planning, I've never argued for it, so kindly stop trying to put words in my mouth. I am not here to strip all and sundry of their property, order them about and tell them what they can and can't do, because I know better.

And I advocate equally that Dofasco and Stelco (two of Ontario's heavy polluters and largest manufacturers) be subject to as much environmental regulation as the Oil Patch. Randle Reef anyone (coal tar deposit in Hamilton Harbour just off Stelco's docks, one of the worst pollution issues in the Great lakes).

Further, ian, you explicitly rebutted your own argument in the thread where we discussed credit control and systematic risk management at the Bank of Montreal. I said that ultimate responsibility for the BMO's credit operations rested with the BMO, deposit insurance and systematic oversight is designed to protect the broad public, not the employees, shareholders or the firm itself, and that a firm must still bear the consequences of its bad decisions and exercise self-restraint for its own self-preservation. That bankers who live bv nutty loans should die by nutty loans.

And you replied (briefly summarized, but with equal hyperbole) that I was from another planet.

[ianlee]

Determinant - lets set aside the environmental externalities issue while acknowledging that governments have the full authority to impose taxes and pass regulations to e.g. order the cleanup of a harbour or air or soil etc. In short, to use the phrase from Trebilcock and Pritchard's excellent report for the Economic Council of Canada circa 1987, The Choice of Governing Instrument, govts face a choice of policy instruments from least coercive e.g. moral suasion to more interventionist e.g. taxation and expenditures to even more coercive regulation to the most coercive i.e. expropriation and government corporations.

I merely responded to what I thought was your oblique suggestion that firms should undertake more processing in Canada - and has oft been suggested in the context of an industrial policy.

My response was that firms understand their markets, opportunities etc and if a firm in the oil industry decides not to build a new refinery but to export to sell, it is because they have determined it is a better strategy having regard to costs, opportunities.

Finally, my comment re BMO and banks is that just as the central bank is "lender of last resort", OSFI and Finance are - to coin a phrase - the "regulators of last resort", backstopping the financial system on the rules e.g. Bank Act, Basel 3, notwithstanding that private financial institutions must act prudently at all times and undertake due diligence as fiduciaries.

BTW, see the latest reported story in FT that the Fed Reserve and ECB are working on a policy for TBTF insolvent banks that would involve wiping out the equity, firing the execs but keeping the bank open as a going concern with recapitalization. That is the path to follow for TBTF.

But to bring this full circle, back to Dutch disease and Mulcair, he raised the issue not to provoke an intellectual discussion, but to point to potential interventions by an NDP Govt. And some of us object and have spoken out against this possible path.

[The Keystone Garter]

How exactly do you export oil, a provincial jurisdiction, from a landloacked province? AB: it's all mine. AB looks at a map: crap...

Zamba, I'd be curious to know how Brazil would be doing if it owned the American sugar market. It is a little healthier than corn syrup and thus a suitable target (honey and other sources even better) for an *industrial policy*. Superior climate for sugar has Brazil. Two Senators a State has the USA.

ianlee, can add Hydrogen fuel cells to the list of failed cdn subsidies (maybe $1.5B ROI of $4B). But forgot to mention banks; very few bastions of stability and subsequent learning. I mean, industry is causing the future end of civilization, no criticism? This is way worse than NEP. Prairies low IQ.
About those codes, one of the trickiest census occupation demarciations was tool-and-die machine maker, vs tool and die machine operator. If the dozen most common of these were explained on a Census form...

[Determinant]

Keystone Garter:

Exporting oil is a federal matter as it involves "interprovincial works and undertakings" and interprovincial trade".

I merely responded to what I thought was your oblique suggestion that firms should undertake more processing in Canada - and has oft been suggested in the context of an industrial policy.

I never suggested that. What I did suggest is that Dofasco exemplified a firm engaged in manufacturing and showing that all products are not equal, so they make the products that are more profitable through extra manufacturing (additional stages of production). They also control their costs through their ability to switch from scrap-steel as an input source, processed in their electric arc furnace, to blast furnace processing using iron ore. It's all based on costs.

Going up the value chain is nice, but you can only stay there if you have the support to stay there, a real market. Dofasco has a real market in the Ontario auto industry, the best natural harbour on the Great Lakes, dual input capability and its own iron ore mine.

The only industrial policy I would advocate is building an interprovincial oil pipeline through Northern Ontario. Right now our current Interprovincial pipeline goes through Manitoba and then goes to the US and then back to Sarnia. The executives when it was built said it was the "economic option". Ok, but it leaves Ontario and Quebec without the ability in access Alberta oil free of American interference. This is a national security issue.

We have an all-Canadian route for natural gas but not oil which leaves Ontario and Quebec without a secure domestic source for refining, primarily gasoline.

Price, however, is a completely different issue so no NEP here.

We should have pushed for the CPR option and insisted on an all-Canadian route. As Prime Minister I would want to see such a pipeline built on national security grounds.

[hosertohoosier]

If the Dutch disease is a powerful phenomena, shouldn't we see a divergence between resource-heavy countries (eg. Australia and Canada) and the rest of the pack during periods of commodity booms? That we don't suggests that any Dutch disease effect is pretty minor, at least compared to the broad de-industrialization that has been going on for some time.

[hosertohoosier]

Also, just throwing this out there, if there is a Dutch disease, can there not also be a reverse case?

Some shock (interest rates? A dirty float?) generates a decrease in the value of a country's currency. As a result labour and capital shift into labour-intensive, low-tech export-oriented manufacturing (high-tech goods are less sensitive to exchange rate shifts, and such industries may benefit from the ability to purchase capital goods from abroad).

Then, once the shock dissipates (interest rates change, or international pressure forces the end of the dirty float/undervaluation), low tech manufactures are hit hard. Worse, there hasn't been the development of skills or the accrual of capital necessary to facilitate an easy transition into the kind of high-tech capital-intensive goods that are better suited to a strong exchange rate.

Inter-sectoral economic transitions happen, and they produce dislocations. That said, it isn't clear to me that the Dutch disease scenario is necessarily bad - I can envision many inter-sectoral economic transitions having adverse effects, albeit with a different cast of winners and losers. Low-skilled workers in resource-poor regions are the losers from the Dutch disease story, so it makes sense that the NDP is telling this story, given who votes for them.

[Tim]

The other thing I would like to bring up are what are people's opinions of the Petro Canada Public Participation Act still continuing to be applied to Suncor Energy? If you look the most recent investor presentation of Suncor they talk a great deal about their vertically integrated business model.

[Bob Smith]

Hoser,

You might look to the EU as an "anti" dutch diseaase. A highly efficient Germany manufactures high value products and exports them globally, propping up the value of the Euro, making the industries of other EU countries uncompetitive (Greece?).