Jus t about a year ago, Senate page Br iget te DePape in terrupted the government ’s throne speech wi th her f i rs t message to Canadians: Stop Harper. S ince then, the feis t y 22-year - old has expanded on that thought. Here’s a sampl ing f rom her s tar turn as a rogue page through to her la tes t s t in t on the Alber ta campaign t rai l .

Mark Carney doesn’t think Canada has any control over the resource boom.

The 47-year-old governor of the Bank of Canada, sitting beneath the portraits of his predecessors in the bank’s stately Graham Towers boardroom, says that as China and other emerging economies have fuelled a sustained rush for resources, sometimes called a commodities supercycle, they have redrawn the fortunes of developed countries like Canada.

The supercycle has spurred a massive expansion of the country’s biggest commodity export in the Albertan oilsands, triggered the deregulation of federal environmental assessments, made mining projects in the country’s northern regions viable and – at least according to the official opposition – contributed to the decline of the manufacturing sector.

As politicians have wrestled with this historic new force in the Canadian economy, misunderstandings about its root causes have developed and, left unchallenged, these could prompt bad policy choices.

“If you draw the wrong conclusions from it, you could do a lot of damage,” said Carney.

That possibility has forced Carney – under the bank’s

Carney on commodities: ‘wrong conclusions … could do a lot of damage’

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mandate to study and explain risk to Canada’s well being – to weigh in on what he and his team of experts believe is really going on.

Dutch Disease

As the spring parliamentary session drew to a close, NDP leader Thomas Mulcair brought the partisan divide over resources to a fever pitch when he claimed Canada suffers from Dutch Disease.

Mulcair’s endorsement of the economic theory, which holds that increased commodity exports bring about a higher currency and make it harder for manufacturers to export, drew jeers from the government benches, who said the Quebec politician was calling the West’s most lucrative business an illness.

The theory is politically expedient because it assumes a simply zero-sum relationship between the resource sector and manufacturers that anyone can understand – we either build factories or dig mines.

With some of the best minds and tools at his disposal, Carney and the bank dug in and sought out the deeper complexity behind the rise of the resource sector.

“We didn’t just sit there and draw a line,” Carney said. “We used a major macro model of which there is no analog in this country and virtually no analog in the world which ran those simulations.”

The result was an analysis presented in the “Dutch Disease” speech, which Carney delivered at an annual meeting of global business people at the Spruce Meadows equestrian club southwest of Calgary on September 7.

“Unambiguously good”

The speech makes mincemeat out of the Dutch Disease caricature, though it arguably paints a more dire situation than the one expounded by Mulcair.

It takes its cue primarily from the global economic outlook – a stagnant U.S., a fumbling Europe and the emerging economies that are leading growth.

Drawing from an analysis of where these economies are headed, Carney ties the resource boom to the global restructuring that the emerging economies are creating in order to fulfill their material needs.

By and large, appreciating this seismic shift is where the debate over the resource boom should begin, in Carney’s view. (It will be dealt with in more detail in tomorrow’s follow-up story.)

But the speech also takes into account the mechanics of the resource boom within Canada: the impact on incomes, changes in government tax revenue and new opportunities brought on by higher energy prices.

The net judgment Carney delivered to the Calgary crowd was that high commodity prices were “unambiguously good” for a country with lots of commodities.

“The simply starting point, that is based on a lot of analysis, is that higher commodity prices are good overall for the Canadian economy,” says Carney in the interview at the bank a week later.

“So ‘unambiguously good’ – that is not a slogan,” said Carney. “It’s not something we want to be true.”

Canada’s middle of the pack positionA major misconception surrounding Canada’s

susceptibility to Dutch Disease is that we’ve veered

sharply into becoming a resource dependent economy.The relatively recent imprimatur of the oilsands onto

the Canadian identity, and perhaps a deep-seated fear over economic and political power shifting West, lends easily to the belief that the economy has suddenly been overpowered by the resource sector.

The governing Conservative’s vocal backing of the oil, gas and mining industries adds to the pastiche of a once progressive, labour-friendly manufacturing country that has given way to a new era of resource extraction, pick-up trucks and oil rigs.

But Canada on the whole remains a much more balanced economy compared with other countries around the world.

Whether you take commodity exports as a share of GDP, commodity exports as a share of total exports, or government dependency on resource revenues, Canada is in the middle of the pack.

Carney meets regularly with the governors of the banks of Australia, Chile, Norway, Russia, Saudi Arabia and other countries that have a much more severe dependency on commodity exports.

At the meetings, which Carney attends in his role on the board of the Bank of International Settlements, they often discuss the volatility of commodity prices on their economies, he says.

“It does create challenges and it does for them tip the balance toward having resource funds or intergenerational funds or sovereign wealth funds, depending on the term you want to use, that helps to smooth and spread over time windfall revenues,” he said. “Norway is probably the classic example of that but Russia has a fairly sophisticated tiering of funds as does Chile.”

Hewers of wood and drawers of water?

Another thing Canadians might resist about the resource sector is the assumption that it is a less dynamic and innovative industry, and that it creates a kind of complacency in the economy that keeps entrepreneurs from creating a high-tech, mature business environment.

In other words, it’s that old pejorative adage that Canadians are mere hewers of wood and drawers of water.

But Carney flips this view on its head.“In terms of the resource sector writ large, one of the

things we lament in generally in Canada, rightfully so in many cases, is that the venture capital industry is relatively a poor performer,” Carney said. “And then one points to a lack of entrepreneurial spirit.”

But “if you look at the resource sector in Canada, the ecosystem there is very entrepreneurial, very venture capital, (a) very high-risk sector that invests around the world.”

From his vantage point, Carney doesn’t sea change in identity that both the government and opposition play up for different reasons.

“We should not accept and I don’t think Canadians do accept (…) that we’re going to be a commodity economy,” Carney said.

“The people in that area (around resources) are going to develop it and we should make sure we maximize the benefits of it across the country.”

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Mark Carney keeps changing the subject.The governor of the Bank of Canada has agreed to an

interview to discuss the resource boom – and whether it’s good for Canada – but the conversation keeps turning to the global economic situation.

“The nature of growth globally is shifting,” Carney said. “In our opinion, we need a sustained strategy to really build our penetration of emerging markets and that is well beyond commodities – that is not a commodities statement.”

That’s the trouble with the resource boom, or the commodities supercycle as it’s sometimes called. It

‘Nature of global growth is shifting,’ and not just for commodities: Carney

can’t be switched off and on to benefit other businesses that may be having a hard time adjusting to the resource sector’s newfound success.

In Carney’s view, the commodities boom is part and parcel of a new global economic landscape where growth is driven by emerging economies – a landscape that has for only one of its consequences a stronger draw on commodities.

It requires an economic adjustment that should involve rethinking how we sell manufactured goods as well as resources, he said.

“That adjustment, if we do it right, will take place over the course of a decade and it requires a very clear-eyed focus and a sustained focus on how do we reorient manufacturing and services exports with more east-west than north-south,” he said.

If Canadian policy-makers want to respond to the resource boom, they should adjust the economy according to the root changes in the global economy in a holistic way rather than fuss over just one of its effects.

“We’re living in the Asian-driven scenario now,” said Carney. “That’s the way it’s going to be.”

The way it was

The new economic era begins where the American one ends, according to Carney.

America’s ability to lead global growth has waned and, with it, so have the commodity prices that were once considered normal.

Today, the world is one “where the United States is not as strong as it used to be,” said Carney. “It’s still the

largest economy, it’s still growing. But it’s not as strong as it used to be and we don’t think it’s going to be as strong for foreseeable planning future because they need to work out their balance sheet issues.”

Rather, it’s “a world where Asia and major emerging markets are really driving growth.”

To underscore just how much Canada is structured into the U.S.-led growth era, Carney compares the different impacts of commodity price peaks on Canada.

“The U.S. demand-driven commodity price increase is almost three times as powerful in terms of overall impact on GDP – net impact of all those adjustments and other factors – than an Asian-driven commodity price increase,” he said.

“Different types of commodity cycles are better,” he later said. “A U.S. one is better than an Asian one.”

Some growth more commodity-intensive than othersBut don’t let that fool you into thinking Asia-driven

growth doesn’t boost commodity prices as much as U.S.-led growth.

Because what matters most in determining growth’s effects on commodity prices more globally is the kind of growth – whether it’s coming from a developed or developing economy.

Over the course of the last decade, China and other emerging economies have been lifting people out of poverty and into the middle class.

That kind of growth is more commodity-intensive because it means people eat more protein, live in bigger homes and begin to drive cars.

And when developed countries lead growth, the impact on commodity prices is minimal because, at a certain point, bigger paycheques don’t translate into

eating more food or consuming that much more in material goods in terms of volume.

“We’re in an era where global growth is more commodity intensive for a period of time,” said Carney. “A given dollar of GDP in China is much more commodity intensive than a given dollar of GDP in the U.S. or more broadly in the advanced world.”

A bigger, slower China is still growing

China is the linchpin in the rise of the emerging economies — and therefore the chief fuel behind the commodities supercycle.

Its combination of sheer population size and government control are what allowed it to create the supercycle in a sense, since it requires a huge volume of people going into the middle class and a sustained drive toward that aim.

Nowhere was that combination of conditions so crucial as after the 2008 financial crash when China almost single handedly reversed a downward death spiral in commodity prices by releasing a $586 billion stimulus plan.

With China’s economy slowing down over the past year, many may ask whether the supercycle is at an end.

But Carney doesn’t think you can cut China out of the picture so quickly.

“A slower, bigger China still adds a lot more to global GDP than it did five years ago – than it did ten years ago – when it was growing faster because it’s a much bigger economy,” said Carney. “This is an economy that has been more than doubling less than every seven years

and now is legitimately, on a market rate exchange basis, almost an US$8 trillion dollar economy.”

It’s the per capita income, stupid

While Carney has described increased urbanization as the thing to watch when looking to see how far the supercycle has to go in past speeches, he said a rise in per capita incomes around the world essentially describes the same phenomena.

When per capita income is low, people don’t eat very much or live with much in terms of material goods and there is little impact on commodity prices, as mentioned above.

But “once you get to that $3,000 to $12,000 per capita income sweet spot, if you will, that’s where there is a dramatic expansion and deepening of the middle class,” said Carney.

After that point, the draw on commodities becomes less pronounced.

And in China, per capita income is just over $3,000 right now, said Carney.

“So even though many of the cities that we go to look very highly urbanized, there’s a lot still to happen if (growth) continues,” he said.

Furthermore, the Bank of Canada sees people making the move into the “per capita income sweet spot” around the world.

“The scale of population and the proportion of global population that is emerging now is unprecedented by any metric and that creates, will create, sustained support for commodity prices,” said Carney.

All of that points to a commodities supercycle

that won’t begin slumping anytime soon, even if commodity prices go down, as they did over the spring and summer, when they dropped 13 per cent.

“Our view is not that commodity prices are going to go ever upward to the sky,” said Carney. “The question of our analysis is based on do we think they’re going be be above historical averages?”

And even through this year’s slump, they’ve remained so.

“Even on the trough, (commodity prices) were still above 25 per cent compared to long-term averages and so sometimes in these discussions, these analyses, people get very caught up in the short-term volatilities – the short-term wiggles around a given commodity price and say it’s moved in or it’s moved out,” he said.

“It’s a supercycle because of a standard deviation basis,” he said.

Tilting the Canadian economic axis

Where most see a resource boom, Carney sees the rise of the Asian-led world economy.

He suggests an adjustment that involves both the resource and manufacturing sectors, among others industries.

“It reinforces this need to diversify our trade,” he said. “When we say diversify our trade, just to be absolutely clear, that’s not simplistically “We should sell more commodities to Asia.’ That’s actually not the point.”

“The point is that from a manufacturing and services side — we need to diversify our trade for a variety of reasons, but one of them is to take the specifics of this situation when we’re talking about commodities — is to

re-establish a more positive correlation between where commodity prices go, what happens to the exchange rate in that environment, and what the demand will be for our other products which are facing competitive pressures, obviously, because of our exchange rate.”

So Carney’s view is not a simplistic endorsement of the governing Conservative’s support of the Northern Gateway oil pipeline in northern British Columbia, which will open the Albertan oilsands to Asian markets, or more energy co-operation between Canada and China as is the case with the proposed Nexen-CNOOC deal currently being under review by Ottawa.

Rather, he wants those concerned about the economic impacts about the resource boom to see it in the context of all the economic impacts stemming from the same cause — a world growing fastest in emerging economies.

So sure, tough adjustments for manufacturers are happening and will continue to happen, but wrestling with that must keep in mind wrestling with the new realities of Asian-driven growth. There’s no ‘old normal’ to go back to — where Ontario and Quebec manufacturers could depend on hungry American consumers.

That means tilting the Canadian economy more along an east-west axis rather than north-south one to best take advantage of growth in emerging economies.

“Again, forget about commodities,” he said. “The whole other sides of the economy — there is no other one side of the economy — that we do want to grow needs a much more aggressive focus on these major emerging markets.”

‘Now’s the time to build,’ Carney says; Surprise upsides to an expensive dollar

High commodity prices may hurt manufacturers, but they could provide ways to revive the sector and even reasons to go green, said Mark Carney.

The resource boom, sometimes called a commodities supercycle, stems from the rise of emerging economies as the main drivers of global growth and is “unambiguously good” for the country, said the governor of the Bank of Canada in an interview with iPolitics last week.

But while the benefits for the country’s miners and petroleum producers are obvious, Carney’s feel-good conclusion takes into account other opportunities for Canada stemming from the economic momentum of places like China.

“Just because it’s good doesn’t mean it could not be a whole lot better,” said Carney in the interview. “And that gets into questions of how do we maximize the returns, how do we deal with this world that has really been transformed?”

“There’s a real role for policy to ensure that good is better,” he said later. “And now that’s where the Bank of Canada stops and others take over because it’s not our responsibility.”

Carney is, in fact, quite limited in the kind of recommendations he can make as policy makers wrestled with the impacts of the supercycle.

But once you look at his analysis of the resource boom’s causes and impacts on the Canadian economy, spelled out in a speech he gave in Calgary on September 7, you begin to see that “unambiguously good” doesn’t just mean pumping for more oil and digging more mines.

Where Carney is coming from

The Bank of Canada has numerous roles in the economy: manage inflation, distribute and control bank notes and keep the financial system stable.

One element of conducting monetary policy is analyzing the forces impacting the Canadian economy, said Carney, and forecasting what’s most like to happen and explaining risks on the horizon.

“All that is in our policy,” he said.But beyond painting an accurate picture of the

economic reality Canada finds itself in, and from the same position, as observer, point out where risks and benefits will lie in the future, there’s little more the bank can do.

“When you get to the broader suite of measures that governments – and potentially companies, but essentially governments – can do to address or maximize the returns for all Canadians of some section of the Canadian economy, we have to be very careful in being prescriptive,” says Carney. “These are not our responsibilities.”

Importing tech will be cheaper

In his Calgary speech, Carney explained that the resource boom is part of a global economic

restructuring where the commodity-intensive growth in emerging economies will keep resource prices high and will reconfigure where Canadian businesses can find lucrative markets.

In adjusting to this new normal, where commodity prices will keep the dollar high and manufacturers will face new pressures, that same sector will have at least one way to create opportunity, said Carney.

“Because of the pressure on the currency that (high commodity prices) does contribute to, (it) makes importing manufacturing equipment cheaper and we need to take advantage of it,” he said. “It provides us opportunities also to open up some of those new markets and the question is whether we leverage those markets as much as possible.”

A new green hope?

The commodities supercycle is, for the most part, depicted as a bane for the environment as companies scour previously pristine parts of the globe for resources.

But there’s a green lining to at least one dimension of the commodities cycle – the high price of energy.

“If commodities are expensive, you want to be as efficient as possible,” said Carney. “There is a big opportunity here in, we use the term ‘resource productivity,’ but basically energy efficiency.”

With a new premium on conservation and increased efficiency, Canada should seize the edge it already has in energy, technology and building efficiency, he said.

That helps us gain an economic edge – and more customers — over places without these investments.

“The countries that are driving the commodities cycle,

they don’t like high commodity prices,” he said. “They’re the ones who are paying the price for high commodity prices.”

“They are relatively less efficient per dollar of GDP so the export market there for energy efficiency – for resource productivity writ large – is huge, measured in the trillions of dollars over the next decade,” said Carney.

An exception

One of the policy changes the bank does have under its control is toying with the exchange rate, which, when Carney gave his Calgary speech, he explained he would not do.

“Some have argued that the Bank of Canada could improve welfare by leaning against commodity-driven movements in the nominal exchange rate,” said Carney in his Calgary speech.

The bank used its top-notch trade model to simulate what leaning against a commodity-driven exchange rate appreciation toward a policy rate would do to the economy, said Carney.

“In the short run, stabilizing the nominal exchange rate helps to support non-commodity exports as well as Canadian producers who face competition from imports,” he said. “But ultimately, this effort is futile.”

The economic forces that are pushing the currency up wouldn’t just disappear.

“Over time, wages and inflation rise, causing the real exchange rate to appreciate,” he said. “Non-resource exporters are faced with the same competitiveness challenges as they are today.”

There would be above-target inflation and economic

output would drop, he said. “The outcome could be even worse if the bank cannot quickly re-establish its credibility after betraying earlier commitments to Canadians.”

That’s why, except for extreme circumstances, the bank doesn’t intervene in the exchange rate.

Time to take risks

In Carney’s view, a more high-tech manufacturing sector focused on energy efficiency could help tackle Canada’s lagging productivity.

“We’re just not as productive as we should be,” he said. “Our productivity is 78 per cent of the United States on the whole and the U.S. is not the most productive place in the world. That’s something we can change.”

“That’s something our businesses can change and governments can support,” he said, echoing calls he made earlier this month to get corporations to spend more of their saved-up cash.

“Instead of waiting around for the world to become a less risky place and everything to be okay, now’s the time to build those opportunities in the emerging world,” he said.

“Now’s the time to close that productivity gap because we’ve got a high dollar, we can import machinery and equipment,” he said.

“We have a financial sector which is there and is going to be there for the bad times as well as the good times,” he said. “So the argument ‘The world might get tough and I’ll be left without a banker’ may be true in a number of jurisdictions but it isn’t true in Canada so this is time to really get on it.”

Interview by James MunsonAll photos by Cynthia Munster

Design by Jessie Willms

iPolitics, 2012