The myths and realities behind Ontario manufacturing

Province wrong to blame its debts woes on plight of its manufacturing sector

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TORONTO, OTTAWA OUT

By Robert Murphy
and Niels Veldhuis
The Fraser Institute

VANCOUVER, BC Jun 26, 2015/ Troy Media/ – Ontario’s chronic budget deficits have been a problem for more than a decade, as they initially surfaced during the early 2000s but came back with a vengeance once the recession struck.

Defenders of the status quo argue that Queen’s Park isn’t to blame for the huge increase in debt because of the difficulties in restructuring the province’s manufacturing base. However, as we document in a new study for the Fraser Institute, such a glib dismissal of Ontario’s massive debt problem may be very misleading.

The facts about Ontario manufacturing

Let’s look at three myths about Ontario manufacturing.

Myth #1: Ontario’s reliance on manufacturing explains its debt trouble. Compare Ontario (and Quebec) with the five so-called “Rust Belt” states, which were also exposed to a restructuring of manufacturing yet maintained much better budget discipline. Over the period 1999-2013, the share of manufacturing in the economy was higher in Indiana (28 per cent), Michigan (19 per cent), and Ohio (18 per cent) than in both Quebec (17 per cent) and Ontario (16 per cent). These two provinces in turn had economies more geared to manufacturing than the other two Rust Belt states, Pennsylvania (14 per cent) and Illinois (13 per cent).

Yet even though several of the U.S. Rust Belt states were more reliant on manufacturing than the provinces, they all carry much lower debt loads. As of 2011/12, net government debt as a share of GDP was 36 per cent in Ontario and a whopping 49 per cent in Quebec, while it was 5 per cent or lower in the five Rust Belt states. Even the increase in government debt, in percentage-point terms from 1998/99, was higher among Quebec and Ontario than it was for any Rust Belt state.

Myth #2: Advanced economies have no choice but to lose manufacturing to developing countries with lower labour costs. Undeniably, cheaper labour provides an advantage to developing countries as the globe becomes more integrated, but we ontario manufacturingmust not confuse cause and effect. The reason Canadian workers command higher pay than, say, their counterparts in China is that Canadian workers are more productive, taking advantage of better training and equipment. When Ontario’s manufacturing share falls from 19.9 per cent of GDP in 1999 to 12.8 per cent by 2013 – a fall of 7.1 percentage points – Ontario policymakers can’t merely blame “cheap foreign labour” or “globalization.” There are many factors at work, including some that Ontario policymakers can control.

Indeed, the three states of Indiana, Illinois, and Michigan saw an increase in manufacturing’s share of their economy between 1999 and 2013. Illinois and Michigan experienced only slight gains, but manufacturing in Indiana increased substantially from 26.1 per cent in 1999 to 30 per cent in 2013. The United States struggles, too, against “cheap foreign labour” and yet some of its states managed to boost their manufacturing sectors.

Myth #3: Ontario manufacturing has been devastated by an artificially strong Canadian dollar. It’s true that the Canadian dollar strengthened sharply against the U.S. dollar, from 62 cents in January 2002 to $1.03 by October 2007, and (other things equal) such appreciation makes it harder for Canadian manufacturers to export their wares. However, this rapid appreciation largely offset the depreciation of the Canadian dollar during the 1990s, which (at the time) gave an artificial boost to manufacturing. As we show in our study, from 1976 to early 2015, the Canadian dollar on average traded for 82 cents against the U.S. dollar. That’s roughly in line with its current value, meaning that Ontario policymakers cannot attribute budgetary woes going forward to a “strong dollar.”

Even with talk of painful austerity, Ontario Finance Minister Charles Sousa projects a deficit this year of $8.5 billion, and doesn’t predict an actual balancing of the books until 2017-18 fiscal year. It’s popular to blame Ontario’s profligacy on manufacturing woes, but policymakers can’t get off the hook so easily.

U.S. counterpart states kept their spending in line, despite a heavier reliance on manufacturing. And the Canadian dollar is currently trading at a long-term average. Those are the myth-busting facts.

Robert P. Murphy is a Senior Fellow and Niels Veldhuis President of the Fraser Institute.

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