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OVER THE EDGE

November 21-December 5, 2007

So High It Can Touch
The Sky

Sure, tourism and lumber are going to be hit hard.
But is there a silver lining to the robust loonie?

ANDREW KURJATA

FEATURES AND
Opinions Epiror

With daily reports
of a soaring Canadian
dollar hitting levels
many economists feel
shouldn’t be possible,
it’s hard to remember
that just five years ago
the loonie was at an
all-time low, trading at
62 cents US. But since
then there has been
steady growth, first hit-
ting 76 cents, then 81,
then 92, and, on Sep-
tember 20 at 10:58 a.m,
the loonie achieved par-
ity with the American
greenback for the first
time since 1976. At the
time, it was written off
as an anomaly, some-
thing interest rates and
US economic recovery
would soon straighten
out. But despite warn-
ings from economists
and the Bank of Can-
ada, the loonie just kept
on going. And going.
And going.

It’s no longer sitting
at the impressive high
of $1.10 US, but at the
time of this writing the
loonie is still comfort-
ably (or uncomfortably)
high, closing at just
below $1.04. Many are
saying that by the time
you read this it will be
back where it belongs,
in the $0.97 range, but
the experts have been
wrong before. And if
ever there was a time
for our golden goose to
get a jump on US bills,
this is it. The Amer-
ican economy is tank-
ing, driving foreign
investors out in droves.
Meanwhile, Canadian
unemployment is at
historically low levels,
and the robust oil and
energy industry is lead-
ing many speculators to
bet on future growth.

In both these areas
you can, at least in part,
blame China: its strong
position means that any
moves it makes will
have a profound effect
on other economies.
Of course, the problem
right now seems to be
that it’s not making any
moves at all. China’s
government has refused

to allow for much infla-
tion when it comes to
its own currency, mean-
ing the yuan is trading
at a rate far lower than
it should be, prompting
a number of politicians
to warn of “havoc” in
the international econ-
omy. Canadian Finance
Minister Jim Flaherty
has joined European
officials in pressuring
China to allow for more
flexibility in its curren-
cy rates, saying that the
“turbulence” caused by
Asian markets is weigh-
ing hard on Canada.
Then there’s the fact
that the Chinese own
more US dollars than
any other foreign dir-
ect investors. Ongoing
speculation that China
may trade these in for
a more robust currency
has led to further USD
declines. And don’t
discount the role of
China’s hunger for for-
eign fuels in the current
strength of Canada’s oil
industry.

Whatever the rea-
sons, the fact remains:
despite what others
say can and should be
possible, the Canadian
dollar is higher than
ever. And that leads
one to wonder: what if
at some point, now or
in the not-so-distant fu-
ture, the Canadian dol-
lar gets to levels above
the US dollar, and then
doesn’t come down?
Would there be a flood
of lost jobs? Or would
new opportunities offset
these costs? You don’t
have to look far to see
the doom-and-gloom.
Even back when it
was trading at 93 cents
a pop, analysts were
warning of the costs
of a stronger Canadian
currency. Then, as now,
they pointed to the loss
of jobs as outsourcing
to Canadian producers
became less attractive
for US companies. This
is indeed happening.
Over the past summer,
mills throughout north-
em BC scaled back
their production, and a
recent spat of closures
has led to hundreds of
lost jobs in the region.
Similar stories are

coming out across the
country, with everyone
from autoworkers to
paper producers being
affected by the drop
in demand for their
products in the United
States.

Of course, the hid-
den story here is one
that has been plaguing
politicians for decades:
the dependence of the
Canadian economy
on American markets.
Pierre Trudeau tried to
deal with it by nation-
alizing industry, while
Brian Mulroney went
by the maxim “If you
can’t beat ‘em, join
‘em.” The 1988 fair
trade agreement was
brought on by the fact
that despite Canada’s
best efforts, businesses
simply could not ignore
the lure of the Amer-
ican marketplace. Since
then, the two economies
have become ever more
linked, with nearly 80%
of Canada’s exports
moving south-- and for
a country whose wealth
is export-based, that
means a lot.

In other countries, a
strong currency is good
news. The Euro has
been sitting above the
USD for years, as has
the pound in Britain.
It’s only for countries
dependent on _ sell-
ing cheap labour and
resources - generally
Asian and African ones
- that a rise in a curren-
cy’s value is seen as a
bad thing. When exam-
ined this way, Canada
might be seen as some-
thing less than flatter-
ing to our post-indus-
trial mindset: a banana
republic of the north.

And this is where, for
some, the opportunity
of a high Canadian dol-
lar comes in. Canadian
businesses, politicians,
and consumers will
have to grapple with
how to make Canada
work, with or without
the United States. Tour-
ism will have to start
actually highlighting
the attraction of Can-
ada, rather than getting
by on, “We’re cheaper
than the United States,”
which never worked

much anyways. Same
goes for other indus-
tries, who will be forced
to be more competitive,
thus stronger over all.
This might mean look-
ing to other foreign
marketplaces. Better

yet, it might mean di-

versifying the econ-
omy to become less
export-based. Against
the backdrop of climate
change we need a ma-
jor upheaval in current
economic _ practices,
which are largely based
on unsustainable en-
vironmental develop-
ment.

It’s debatable wheth-
er a crisis is necessary
in order to get a country
to undergo deep, mean-
ingful change. It is true,
though, that as long as
it has been easier to
depend on American
demand for cheap Can-
adian goods precipitat-
ed on a weak national
currency, we’ve been
happy to go with the

flow. For all the talk of

diversification, the easy
money has always been
in selling off Canada’s
assets, from labour to
trees to hockey teams
to oil sands to Tim
Horton’s. Much of the
current talk about how
to “fix” the loonie in-
volves kicking it until
its down, so that some
rich American busi-
nessmen might buy
our stuff again. But
this will only work so
long as the US is an
economically success-
ful country, something
that, between massive
foreign debt and an
incredibly costly war,
seems increasingly un-
likely. The crisis need-
ed to facilitate change
is here, it’s in the fail-
ing American econ-
omy. Everyone keeps
betting our future on
its recovery, but who
knows when that will
be and how long it will
last? Rather than try-
ing to join that sinking
ship, maybe it’s time to
sail on our own.

IS APPRECIATION OF THE CANADIAN DOLLAR A
BLESSING OR A CURSE?

Dr. Ajit Dayanandan is an Assistant

rofessor of Economics, and currently
olds a BA, MA, Mphil, and PhD in the
Yield. He has worked for the Reserve
Bank of India and has been published in
international economic journals. He of-
fered his own perspective on the cause
and possible effects of a higher Canad-
ian dollar.

The Canadian dollar has appreci-
ated substantially in recent months.

e strength of the Canadian dollar is

primarily driven by a commodity boom

orld-wide. Canada is endowed with a
lot of resources (oil, materials). There is
huge demand for these resources from
he fast growing BRIC countries (Brazil,

ussia, India and China). The commod-
lity prices have soared in recent years and
his has spurred the appreciation of Can-
adian dollar.

Apart from the commodity boom,

anada has a relatively sound macro-
economic situation — fiscal surplus (at
ederal level), no trade deficit and rela-
tively low inflation compared to US. The

nited States has huge trade and fiscal
deficit and its debt level has increased
substantially in recent years (in Canada
debt as a proportion of GDP has de-
reased in recent years).

Positives:

Canadian residents travelling abroad
an get more foreign currency in ex-
hange for Canadian dollar and hence
purchase more. Canadians can enjoy
better price for imported goods.

But the strong Canadian dollar will

ake travel from south of border (from

S) unattractive. So it could hurt our

Makes exports un-competitive the so
called Dutch disease- “Dutch Disease’
refers to the combination of a booming
resource sector, a rising currency and a
resulting decline in output in manufac
turing.

The strengthening of Canadian dolla
will certainly affect industries such a:
automobiles, lumber industry and smal.
business. Already in the northern BC
Canfor has announced temporary clos
ure of many mills. This will affect the
northern communities.

Some observers see the possibility of
‘Dutch disease’ occurring in Canada to
be slim. Their argument is that the Dutch
case involved the discovery of a new re
source (oil). In the case of Canada, oi
has been existence for a long time, it 1
only the increased demand for oil from
BRIC countries which has pushed up
gas(oil) prices close to 100.

What can be done to prevent furthe
appreciation of the Canadian dollar?

Canadian interest rates were relativel
lower than in U.S. With the sub-prime
crises in US in recent months, US Feder.
al Reserve has reduced the federal funds
tate (the benchmark interest rate) by 7
basis points. Bank of Canada has not re
duced the interest rates (overnight rate),
If Bank of Canada reduces its overnight
rate, the Canadian dollar could soften,
But Bank of Canada considers inflatio
risk to be more important than the risk
to its industries (possibility of Dutch dis
ease happening here). This is the dilem:
ma Canadian policy makers are facing,
Economic data in the coming month:
will decide whether Canadian dollar wil
further appreciate or not.

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