OTTAWA — A new paper on the impact the strong Canadian dollar has had on the economy puts into sharp focus why Ontario Premier Dalton McGuinty is not the oilsands’ best friend.

The analysis by Bank of Montreal economist Douglas Porter traces the 10-year climb of the loonie from about 62-cents in the first quarter of 2002 to it current level above par with the U.S. currency.

The loonie’s surge has had several triggers, but a big one has been wealth flooding into the country from exports of commodities such as oil, triggering a 22 per cent contraction in the manufacturing sector, with many of those 500,000 lost jobs being shed in Ontario.

On Monday, the Ontario premier ruffled the feathers of his Alberta counterpart, Alison Redford, by suggesting the strong “petrodollar” had hobbled his province’s manufactured exports.

“If I had my preferences as to whether we had a rapidly growing oil and gas sector in the West or a lower dollar, I’ll tell you where I stand — with the lower dollar,” McGuinty said.

His comments drew a swift attack from Redford and Saskatchewan Premier Brad Wall, but is somewhat backed by a 2008 report from the Organization for Economic Co-operation and Development that referenced the phenomenon known as “Dutch disease.”

The term was coined in 1977 by The Economist magazine to describe what happened when the Netherlands first began rapid expansion of a natural gas field in 1959. As the export of gas climbed, so did the Dutch currency, the guilder, making that country’s exports less competitive and leading to a collapse of jobs in other sectors.

The shift from manufacturing to oil exports as a key engine of economy growth has hurt Central Canada, particularly Ontario, and helped Alberta, which Porter points out has been the country’s “runaway job growth king” over the past decade.

“Fortunately for Canada, the factory job losses have been largely mirrored by solid gains in the resource sector over the past 10 years,” Porter says.

“Unfortunately, the sector remains only one-fifth the size of manufacturing,” he said, noting that trade-offs for growth in the resource sector have not been sufficient to compensate for the losses.

The Canadian Manufacturers and Exporters has also blamed the high dollar, which reached parity about four years ago, for the continuing difficulties in the sector, although the group sees weak U.S. demand as more significant.

Economist Jack Mintz of the School for Public Policy in Calgary says blaming the dollar for manufacturing’s decline is too simplistic. He notes that other countries, such as Switzerland, have been able to have the best of both worlds, a robust economy and a strong currency.

Part of the difficulties for Ontario, he said, is that a large part of province’s industries were tied to General Motors and Chrysler, which collapsed during the recession.

As well, Canada has seen increased competition from emerging manufacturing powerhouses like China, India, Korea and Brazil.

Porter said he wants to make clear he is not putting the 500,000 lost jobs solely on the doorstep of the dollar, but he added that if the currency continues to remain at current levels, the hollowing out of the sector will only intensify.

Of note was the recent abandonment of the Electro-Motive plant in London, Ont., among other plant shutdowns.

Notwithstanding the gradual recovery in the auto sector, “Canadian manufacturing payrolls look extremely vulnerable to further weakness at today’s exchange rate,” he said.

The decade-long contraction in the key sector has also had several interesting side-effects, including on productivity, the report argues.

The traditional assumption is that a strong currency will force firms to become lean and mean, but manufacturing is among the most competitive sectors in the economy. If there’s less of it, overall productivity declines.

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“Looking at the historical record, periods of Canadian dollar strength have been associated with some of the weakest productivity gains, while the strongest increases have come during periods of loonie weakness,” Porter said.

And Canadians haven’t gained as much in terms of lower consumer prices as conventional wisdom suggests, possibly because retailers haven’t fully passed through the benefits of cheaper imports.

Porter also notes that average inflation has been a bit higher in the past 10 years at 2.1 per cent than in the previous decade, at 1.6 per cent.

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